What is Option Chain? How Do You Read It?

6 mins read
by Angel One

An option chain is a chart that provides in-depth information about all stock option contracts available for Nifty stocks.

Options may be confusing initially; it may seem like rows of random numbers. Option chain charts provide valuable information about the current value of security and how it will be affected in the long term. Understanding an options chain can help investors become more informed and make the right choices within the market.

What Is an Options Chain?

An options chain has two sections: call and put. A call option is a contract that gives you the right but not the obligation to buy for the underlying at a specified price and within the Option’s expiration date. A put option is a contract that gives you the right but not the obligation to sell the underlying at a specified price and within the Option’s expiration date. An option’s strike price is additionally listed, which is that the stock price at which the investor buys the stock if the choice is exercised. An option chain lists all available option contracts, both puts, and calls, for given security. The option chain matrix is most useful for the next trading day. Traders typically focus on ‘last price,’ ‘net change,’ ‘bid,’ and ‘ask’ columns to assess current market conditions.

Usage of Option Chain

  • Understanding market sentiment: The option chain offers valuable insight into market sentiment for a specific underlying asset. Traders can analyse the number of open interests at different strike prices to understand whether the traders are bullish, bearish, or neutral. 
  • Identifying support and resistance: The option chain data helps traders identify potential support and resistance levels. High open interest at a particular strike price may act as a support or resistance level, indicating the levels where significant buying and selling pressures exist. 
  • Evaluating implied volatility: The option chain can give traders an idea about the implied volatility of an asset at a particular strike price. Implied volatility refers to market participants expectations regarding asset price changes.  
  •  Make informed trading strategy: Traders can use the values of the option chain to create different options trading strategies. By analysing the number of open interests at different strike prices and premiums, they can construct strategies that align with their overall trading strategy and risk tolerance level.  
  • Risk management and hedging: Using option chain, traders can assess the potential risk associated with their existing open positions. The option chain helps traders analyse the options greeks and form effective hedging techniques.

Importance of the Option Chain

Understanding an option chain unlocks several advantages for traders:

  1. Spotting In-the-Money and Out-of-the-Money Options: Quickly see which options are currently profitable (ITM) and which are not (OTM) based on the underlying asset’s price.
  2. Gauging Liquidity by Strike Price: Assess the trading activity for different strike prices, helping you choose options with sufficient liquidity.
  3. Finding Option Premiums: Easily identify the cost (premium) of options based on their strike price and expiration date.
  4. Identifying PotentiRl Price Swings: The option chain can signal potential breakouts or sharp movements in the underlying asset’s price.
  5. Macro vs. Micro Insights: Index option chains offer broader market sentiment, while stock option chains provide specific details about a particular company.
  6. Understanding Complex Strategies: Analyse the potential profitability of straddle and strangle option strategies across various strike prices.
  7. Making Informed Decisions: By considering all this information, traders can align their investment strategies with the current market climate.

In short, the option chain equips both options traders and traditional stock market traders with valuable tools for informed decision-making.

How to Read the Options Chart?

Options Type: There are two types of options Call and Put.

Strike price: The price at which the buyer and seller of the Option agrees to exercise the contract. Options trade become profitable when the worth of an Option crosses the strike price.

OI: Open Interest signifies the interest of traders during a particular strike price. The greater the amount, the more the interest among traders for the actual strike price of an Option. And hence there’s high liquidity for you to trade your Option.

Change in OI: It shows the change in the OI before the expiration date. The difference in OI indicates contracts that are closed, exercised, or squared off.

Volume: It indicates trader interest and the total number of contracts of an Option for a particular strike price traded within the market. It is calculated daily. Volume can help understand the current interest of traders.

IV: Implied Volatility indicates the swing of prices. High IV indicates high swings in prices, and low IV means few or no swings.

LTP: It is the Last Traded Price of an Option.

Net Change: It is the net change of LTP. Positive changes mean a rise in price, while unfavourable changes imply a decrease in price.

Bid Qty: It is the number of buy orders for a specific strike price. This tells you about the present demand for the strike price of an Option.

Bid Price: It is the worth quoted within the last buy order. A price above the LTP may suggest that the Options demand is rising and the other way around.

Ask price: It is the value quoted within the last sell order.

Ask Quantity: it is the number of open sell orders for a specific strike price. It tells you about the availability of the Option.

In-The-Money: If the strike price of the call option is a smaller amount than the present market value, it is considered ITM. If the strike price of the put option is higher than the current market price, it is ITM.

At-The-Money: When the strike price of a Call or Put option is adequate to the present market value of the underlying asset, it is in ATM.

Over-The-Money: If the strike price of the call option is more significant than the asset’s present market value is OTM. OTM’s put option is if the strike price is a smaller amount than the current market value of the underlying asset.

The Relationship of the underlying Option to the strike price

Put Call
In-the-money option The strike price of the Option is higher than the price of the underlying The strike price of the Option is less than the underlying the
Out-of-the-money Option The price of the underlying is greater than the strike price of the Option The price of the underlying is less than the strike price of the Option
At-the-money option The price of the underlying is equal to the strike price of the Option The price of the underlying is similar to the strike price of the Option

Difference Between Put and Call Options

The following are some of the differences between call option and put option.

Feature Call Option Put Option
Right Right to buy an underlying asset Right to sell an underlying asset
Profit Potential Unlimited Limited to the difference between strike price and underlying asset price at expiration, minus the option premium
Loss Potential Limited to the option premium paid Limited to the option premium paid
Market Expectation Bullish (expecting price to increase) Bearish (expecting price to decrease)

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What is option chain?

An option chain is a comprehensive list of all options (put and call) available for trading on a particular underlying asset, such as stocks, currencies, commodities, or indexes. It lists details regarding premium, volume, open interest, etc., for different strike prices.

What is option chain analysis?

Option chain analysis involves studying the available details for in-depth information of all options contracts available for a particular security on the exchange to make a trading strategy. Depending on the presentation of information, traders can find bid-ask quotes, maturity dates, strike prices, etc., related to available options contracts. 

How to read options chart?

The option chain contains details related to strike price, symbol, last, bid, ask, volume, open interest, etc. The symbol represents the contract, and it is unique for each contract. Traders can find trading information related to the contract in the option chain chart and place their bid accordingly.