Option Chain Analysis

Updated: Apr 8, 2021

Welcome to the mastery article related to the options trading strategies for the beginner. As we had discussed in the previous article about the moneyness of the options contracts. We had learned that the intrinsic value of an option is similar to the value of money the option buyer makes on the condition that if he were to exercise the contract. Any option that has an intrinsic value is known as the ‘In the Money’ (ITM) option. Any option that does not have an intrinsic value is known as the ‘Out of the Money’ (OTM) option and If the strike price is almost equal to the market price, then the option is called the ‘At the money’ (ATM) option.

We had also learned that all strikes price lower than ATM are ITM options for the call options. All strike prices higher than ATM are OTM options for the call options. All strikes prices higher than ATM are ITM options for the Put options and all strikes prices lower than ATM are OTM options for the Put options.


Now moving on, we will discuss one of the most important topics in options trading i.e., Option Chain Analysis. Now, you want to know that what is this option chain analysis. So, let me tell you. Stick with me:


The Option chain is a common attribute on most of the exchanges and trading platforms. The option chain is a readymade handbook of sorts that helps you identify all the strikes that are available for a specific underlying asset and also categorize the strikes prices based on their moneyness. Besides, the option chain also gives information such as the premium price which is also known as Last Traded Price (LTP), bid-ask price, volumes, open interest, etc. for each of the option strikes price.


An options chain is a listing of all available options contracts for a specified security. It shows all listed puts, calls, their expiry date, their strike prices, volume, and the pricing information for a single underlying asset within a given fill growth period. The option chain will typically be classified by the expiration date and divide by calls vs. puts.


An options chain tells us the detailed quote and price information and should not be jumbled with an option series or cycle, which instead simply tells the available strike prices or the expiration dates.


Option chains are likely the most natural form of giving information to retail investors. The option quotes are listed in an easy-to-understand order. Traders can find an option premium by following the corresponding maturity period and the strike prices.

The maximum part of online brokers and stock trading platforms show option quotes in the form of an option chain using real-time or delayed information. The chain allows fast scanning of activity, open interest (OI), and price changes. Traders can concentrate on the particular options required to meet a specific options strategy.


Traders may quickly find an underlying asset's trading activity, including the Implied Volatility (IV), the volume of the trading, and open interest by strike price and maturity time. Sorting of data may be by expiry day soonest to furthest, and then further delicate by the strike price, from lowest to highest.


So, an option chain trading strategy can be work out by seeing gathering in open interest (OI) and volumes in various option strikes. There are two ways to access the option chain data. There is the index access which tells us not only about trading the index but also about the market as a complete view.


Then as well, the sectoral indices are very useful in giving us signals about the charm or otherwise of the particular sector in question. Then there is stock-specific option chains analysis which is beneficial as an added analytical screener before taking a final decision on buying or selling a stock. These option chain analyses can be used as an extra level screener for stock decisions.


Now, one question may arise to you. What is this Open Interest (OI)? So, let me tell you.

Open Interest (OI) is a number that tells you how many futures (or Options) contracts are currently open in the stock market. As you all remember that there are always two sides to trade – a buyer and a seller. Let’s assume that the seller sells 1 contract to the buyer. The buyer is supposed to belong on the contract and the seller is supposed to be short on the same contract. The open interest, in this case, is said to be one.


So, the open interest figures tell us how many contracts are open and live in the stock market. Volume on the other hand tells us how many trades were carried out on the given day. For every one buy and one sell, the volume will add up to one.


Increasing open interest indicates that new money is flowing into the market. The result will be that the present trend (up, down, or sideways) will carry on. Declining open interest means that the market is liquidating and tells that the strike price trend is coming to an end.

That’s why open interest provides a lead indicator of a nearing change of trend.

Now, one more concept is there. What is implied Volatility? Implied volatility or (IV) is one of the most important ideas for options traders to understand for two reasons. First, it tells us how volatile the market might be in the future.


Second, implied volatility can help you find out probability. This is a critical component of options trading which may be helpful when trying to find out the similarity of a stock reaching a particular price by a certain time. Keep in mind that while these reasons may assist you when making trading choices, implied volatility does not provide a prediction concerning market direction.


Although implied volatility is viewed as an important piece of facts, above all it is find out by using an option pricing model, which builds the data theoretical in nature. There is no guarantee these predictions will be correct.


So, in conclusion, I would like to say that Option chain analysis is one of the most important factors in options trading. Be read it before trading in futures and options.

143 views0 comments

Recent Posts

See All