Option chain is a tool that shows all information and market opportunities for options for security in an organised format. By learning to read an option chain, investors can better understand the option market and make better trading strategies.
Therefore, it is necessary for traders to understand what an options chain is and how it should be read.
What is Option Chain?
An option chain is a matrix that displays all available option contracts for an asset. It organises call and put options by strike prices and expiration dates, giving traders important information like prices, volume and open interest to evaluate potential trades. It helps traders understand the direction of price movement to make their trading call the next day.
Now that we understand the meaning and use of option chain, let us see the steps to read it.
Simple Steps to Read an Option Chain
Step 1: Find the Option Chain
Visit your trading platform or NSE website and search for the option chain section. Select the specific stock or index you are interested in and choose an expiration date.
Most platforms allow you to filter the data by different expiry dates to focus on the timeframe that matches your trading strategy.
Step 2: Understand Strike Prices
Strike prices are displayed in the central column of an option chain. These are the prices at which you can buy (call) or sell (put) the underlying asset when the option is exercised.
The exchange determines available strike prices, which typically appear in regular intervals above and below the current market price.
Step 3: Identify Calls and Put Options
Call options appear on the left side of the strike price column, while put options are on the right. Calls give the right to buy and puts give the right to sell the underlying asset.
Call prices typically decrease as strike prices increase, while put prices increase as strike prices increase.
Step 4: Check Bid and Ask Prices
The bid price reveals what buyers are ready to pay, while the ask price shows what sellers want to receive. The difference between them is the spread. Lower spreads usually mean better liquidity. A bid price above the last traded price may indicate rising demand, suggesting bullish sentiment.
Step 5: Look at Open Interest and Volume
Open interest in the option chain shows how many contracts are active for a particular option. Volume shows how many contracts traded today.
Higher numbers indicate more liquidity and interest in that particular option strike price. Increasing open interest suggests new money entering the market while decreasing means positions are being closed.
Step 6: Observe Option Status (ITM, ATM, OTM)
In-the-money (ITM) calls have strike prices below market price; ITM puts have strike prices above market price. At-the-money (ATM) options have strike prices approximately equal to the current market price. Out-of-the-money (OTM) calls have strike prices above market price; OTM puts have strike prices below market price.
Step 7: Calculate Put-Call Ratio (PCR)
Divide the total put open interest by call open interest to get the PCR. Values above 1 suggest bullish sentiment, below 1 indicate bearish sentiment and around 1 show market uncertainty. This ratio helps gauge market direction – high Put-Call Ratio often signals potential market reversal from bearish to bullish.
Step 8: Make a Trade
After analysing the option chain, select an appropriate option contract based on your market outlook. For bullish views, buy calls or sell puts. For bearish views, buy puts or sell calls. Consider liquidity (high volume/open interest), implied volatility, and time to expiration before placing your order.
Conclusion
Learning to read an option chain takes time but helps you make better trades. Understanding prices, open interest and other factors helps you pick better opinions. With practice, you can use the option chain to spot opportunities that can help you make profitable trading decisions.
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