How to make the best use of the Options Chain data for Options trading

What is Options Chain?

If you have started trading in options or are preparing yourselves by studying the components of options, this blog will help you understand the major aspect of it. Options market is measured or overviewed by a chart known as options chain. The chart, called options chain, In other words, an options chain is the complete matrix of all the available options contracts for a particular security. It is a list of all the put option and call option strike prices along with their premiums payable for a given maturity period. Options chain data facilitates a complete picture of all the option strikes of a particular stock or index in one frame that helps you get an insight into options, study market growth through a single chart, make informed decisions, and make profitable decisions.

Why is it important to learn reading option chain?

An Options trader has to buy or sell put or call options. So to buy /sell a put/call option you must know to read the options chain. If you can infer the Option chain table, only then you would know what strike price is being sold at what price, and which strike price is more popular among investors. To track any movement in the direction of options market, or analyze the actual trend of the market the options chain is one such simple way. It becomes easy for the trader to read the call and put data presented next to each other in the options chain chart and develop familiarity with the current market and make earning predictions

How do you read the Options chain of various stock?

Let us first look at the format, main components, and the terminologies of the option chain before understanding how to interpret the option chain data.

Above screenshot has been taken from NSE website for the purpose of studying option chain

1. The Format of Options Chain Chart

The Options chain table outlines the data belonging to calls and puts (Types of options) divided by a strike price column in the center listing out various strike prices. The calls are generally presented on the left side and the puts are presented on the right side of the chain of options. Under calls and puts you will find columns of various data like Open Interest (OI), change in OI, Volume, Implied Volatility (IV), LTP, Net change, Bid quantity, Bid Price, Ask Price and Ask quantity.

Not only does the option chain capture price and volume information, but also more analytical parameters, such as change in open interest (OI), implied volatility (IV), etc.

2. Reading the Options Chain

Strike price column lists out the price at which the buyer and the seller have agreed to exercise the contract. The strike price indicates the profitability of the contract. The amount of profit from the options contract is the difference between the stock price and the option strike price at expiration.

In simple words, the options contract is profitable for -

• A call buyer- If the price of the contract reaches the strike price or above on expiry.

• A put buyer- If the price of the contract falls below the strike price on expiry.

3. Terminologies that you need to know to learn reading options chain

OI indicates the number of contracts that are traded but not exercised or squared off for a particular strike price of an option. Open interest is directly proportionate to the interest of traders and further to the liquidity of your option. The higher the OI, the more is the interest of traders in that particular strike price of an option and the more interest of traders, the higher is the liquidity for that particular strike price of an option. A particular strike price of an option with highly liquidity makes it easier for you to trade your option whenever you desire.

• Change in OI indicates the shift in OI within the expiry period of the option. The change in OI informs you about the number of contracts closed, exercised or squared off. Any remarkable or significant shift in the OI should be carefully observed.

• Volume column, indicates the total number of options contracts traded for each strike price is indicated. Volume also influences the interest of traders. Hence, the interest of traders can be tracked based on the volume calculations each day.

• IV indicates the expected future volatility/movement in the price of the underlying security in the contract based on different options prices. A high IV indicates that the market sees potential for large price swings in the price of the stock in either direction and vice versa

• LTP is used to indicate the Last traded price of an option.

• Net change is another parameter that measures the net change in the last traded price.

• Bid Quantity lists down the no. of buy orders for a particular strike price. The no. of orders indicates the demand for a particular strike price.

• Bid Price is the price at which you could sell the option. In this column, the number will indicate the bid price quoted in the last buy order.

• Ask Price is the price at which you can buy the options. The no. in this column will indicate the price in the last sell order.

• Ask Qty indicates the no. of sell orders for a particular strike order. The no. of orders indicates the supply for a particular strike price.

After knowing these terminologies and what do they explain, you might come up with a few more doubts. Moving forward while reading the table you might see some sections shaded and while some unshaded.

The shaded parts are In the Money and the unshaded ones are Over The Money. This classification helps the trader in deciding which strike price to trade, in a given situation in the market.

• ITM - A call option is In The Money (ITM) if its strike price is less than the current market price. A put option is ITM if its strike price is greater than the current market price. Call ITM is when, Strike Price < Current Market Price Put ITM is when, Strike Price > Current Market Price.

• ATM ­- A call or put option is At The Money (ATM) when the strike price of an option is equal to its current market price. ATM is when, Strike Price = Current Market Price.

• OTM - A call option is Out Of The Money (OTM) if its strike price is more than the current market price. A put option is OTM if its strike price is less than the current market price. Call ITM is when, Strike Price > Current Market Price Put ITM is when, Strike Price < Current Market Price.

In simple words, for call, the strike prices that are lower than the current market price of an underlying asset are shaded and for put, the strike prices greater than the current market price are shaded.

The options chain data has two approach: The index strategy that informs us not just about trading the index, but also about the entire market. Similarly, sectoral indices are very helpful in providing us with indicators of the attractiveness or otherwise of the sector in question. Then, before taking a final decision on buying or selling a stock, there are stock specific option chains that are useful as an additional analytical screener. For stock decisions, this option chain review may be used as an additional level screener.