Learn how to read an Option Chain in simple steps7 min read
What is an Option Chain?
Option Chain is a listing that shows all available option contracts for a given security or underlying with their specific features. The list shows all available call and put options for a given underlying with their Prices (Last Traded Price), Expiry Dates, Strike Prices, Open Interest, and advanced features like Implied Volatility and Greeks (like Delta, Gamma, Theta, Vega).
In the Option Chain, the ATM (At the money) Option (the Option (Call/Put) whose strike is closest to the Spot Price will always be highlighted since most of the liquidity in options happens around the ATM strike price.
Eg. If the underlying is Nifty 50 which is trading at suppose 17,845 currently, then the strike price of Nifty 50 closest to 17,845, which is 17,850 will be highlighted.
What is the importance of Option Chain for a trader?
- Easier access to Option Contracts: Option Chain gives a one click access to a whole list of options to choose from and trade. This will benefit a trader since otherwise he/she has to search for the whole script name and then go for trade, and again repeat the same process if he/she has to trade in some other options.
Eg. If a user wants to trade in NIFTY 13th April 17800 Call, then instead of searching for the whole script name, the user can directly open the Option Chain with NIFTY selected, select the correct expiry date (which is 13th April) and then click the left column near the strike of 17800, which will select the required Option Contract page.
- Trade Faster: You don’t need to add option contacts to Watchlist and compare which options to trade. As the option chain shows all the available option contracts with relevant information, you can easily choose the right option and trade faster.
- Access to all the expiries: From the Option chain you can access all the strike prices, across all the expiries of a given underlying (eg. Nifty 50, Nifty Bank, TCS, etc.)
- Informed Decision: Option Chain is also packed with lots of market intelligence data like Option Greeks, Open interest etc. which can be used to analyze and make the right decision before trading.
Features inside the Option Chain
LTP tab in the Option Chain shows the pricing information of all the calls and puts inside a single view along with the %change in the price. The price and %change in price changes real time from broadcast (tick by tick data). The price is the first important thing that the Option Trader looks at before placing any Option Trade.
2. Open Interest:
Open interest is a powerful data point which is used by many traders. By analyzing OI carefully, traders can understand where the smart money is being bet. Open Interest can be used to understand the short term Support and Resistance for the underlying (Nifty, Banknifty, etc). The strike with the highest put option Open Interest strike will be the support and Highest CALL OI Strike will be the resistance for the market
Please note – OI is always seen from the Seller’s perspective, because Selling of the option needs more money (Margin Money) and also has unlimited Risk. It is assumed that Sellers have better access to information, so they are risking their capital. It is assumed that Highest PE OI strike has the highest PE sellers and Highest CE OI strike has the Highest CE Sellers.
Let’s understand with the example:
In the above image Nifty Bank is at 42,261.30, 42000 Strike Put has the highest OI among all the PEs and 42500 Strike Call has the highest OI among all the CEs.
It means 42000 PE has the highest number of sellers so market breaking this level is unlikely, so this is the support for that particular expiry for Bank Nifty and 42500 has the highest CE OI, so it will work as a resistance.
Option Greeks are a set of calculations which traders use to measure different factors that might affect the price of an options contract. The Greeks measure the Option’s Price sensitivity to different factors like underlying price (Delta), Volatility (Vega), Time to expiry (Theta) and also sensitivity of Delta to underlying Price (Gamma). Advanced Traders use Greeks to hedge their risks.
With the information of Greeks, you can make more informed decisions about which options to trade, and when to trade them.
- Delta, which can help you gauge the likelihood an option will expire in-the-money (ITM), meaning its strike price is below (for calls) or above (for puts) the underlying security’s market price.
- Gamma, which can help you estimate how much the Delta might change if the stock price changes.
- Theta, which can help you measure how much value an option might lose each day as it approaches expiration.
- Vega, which can help you understand how sensitive an option might be to large price swings in the underlying stock.
- Implied Volatility, though not actually a Greek, Implied volatility is a forecast of how volatile an underlying stock is expected to be in the future—but it’s strictly theoretical.
4. Alerts for Illiquid Contracts:
Option Chain also shows alerts for contracts deemed to be illiquid. Illiquid contracts are the contracts which show a higher bid ask spread (high difference between the bid price and ask price of buyers and sellers). In Paytm Money we show the contracts as illiquid if there has been no trade in the particular contract since the last 5 minutes, alerting traders to be careful of such contracts.
5. Search Feature in the Option Chain:
Users can also search any other F&O script using the search icon given in the top right section of the Option Chain to land on to the Option Chain of any other stock or index (Eg. TCS, RELIANCE, FINNIFTY, etc).
How to place trades using Option Chain on Paytm Money?
Step 1: Click on the F&O tab on the homescreen or from the Stocks Dashboard to land on the F&O Dashboard. Alternatively go to the Company Detail Page of any F&O stock or index (eg. Nifty 50 or TCS), or any Futures or Options Contract Page.
Step 2: If you have landed on the F&O Dashboard, tap on the Option Chain Widget for Nifty 50, Nifty Bank, Nifty Financial Services etc. to land on the respective Option Chain Page. If you have landed to the company detail page of any stock or index, or any F&O contracts page, click on the Option Chain widget or icon to land on the Option Chain page.
Step 3: Select the Expiry Date from the drop down, and scroll up or down to reach the strike price you want to trade at. Click on the left side of the strike to trade in the particular call Option and Right side of the strike to trade in the particular put Option.
Step 4: Before taking the trade, users can check the live prices from the LTP Tab, Red and Green Bars for call and put open interest respectively to understand where the maximum Open Contracts are there, click on the OI Tab to check the actual open interest values and compare them across various strikes for calls and puts.
Step 5: For traders who use advanced data points, click on the Greeks tab to check the call and put deltas, IVs (Implied Volatility), Gamma, Theta and Vega at various strikes before making an informed decision.
Step 6: After getting all the information and clicking on the required contract, you will land on the respective contract page, from where you can buy or sell the Option Contract and place the required order.
Step 7: Voila! Happy Trading.
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