In this blog we will be learning the basics of option chain analysis for Nifty, Banknifty, Stocks and other indices with examples. For a beginner in Options trading, knowing option chain and analysing the data is very useful. Option chain gives you all the specific data you need while trading in options. Learning how to read an option chain is a vital part to options trading. Many traders lose money in options trading because they don’t fully understand option chains.
Once you understand the option chain, your option trading stratergy and money making skills in share market will certainly improve. Understanding option chain gives you a clear idea about choosing best strike prices like, In the Money (ITM), At the Money(ATM), Out of the Money(OTM). Know more about Option Moneyness here. Let us now begin to understand the basics of Option Chain Analysis.
What is Option Chain?
Option chain is a list or table of all available option contracts. It includes stocks and index with put option and call option, for a given security. The table includes information on Open Interest, volume, Implied Volatility(IV), strike price, premium etc. of a option contract for a given exipration date. Remember, just as there is an option chain for the Nifty, banknifty & other, you have option chains for all the key indices traded in F&O and also for individual stocks where options trading is permitted. However option chain is relevant only when the contract is sufficiently liquid.
How To Find Option Chain Data?
In order to analyse the option chain data, first you need to know basics steps involved. Let us go step by step to know where we can find the option chain list.
- In the first place go to NSE India website. At the top you will see the space for searching stocks. In orange colour Equity will be written. Let us see how does it look like.
- At first we will see, how to search option chain data for stocks. As you can see in the orange box, I kept it as equity and searched the bname of the stock (YES BANK LTD.)
- Once you clicked the name searched, a new page will appear with all the statistics. You need to click on Option Chain at the top right as showed below.
- Once you click on option chain a new page will appear with all the option chain data included. In green box spot price of the stock. Expiry of the contract in red box. In blue box all the calls and puts option data. We will learn all individually later in blog. Just see the data and observe this points. You can make change in expiry of the contract as well.
How to Analyze Nifty Options chain?
With attention to above points, now we will learn how we can analyse option chain and use it in our trading. However its important to understand basics of the main components in option chain. As a matter of fact learning them does not require to be technical in any sense.
As an illustration let us choose Nifty Option chain and analyse the data. In case you do not know what is Nifty? click here. The Option chain data of the Nifty is specifically useful considering that it is one of the most liquid contracts and weekly options are also available on the same.
- Nifty is an combination of top 50 stocks, hence we term it as Index. Nifty is Index of highly active stocks on NSE. In F&O segment, Nifty Futures and Options are most liquid. To find the nifty50 option chain, we need to select the equity derivative option in orange box. Once selected in the search box type nifty and click on it. Similar to stocks, click on option chain mentioned on top right.
- In the image below pay attention to boxes in different colours. In red box price of nifty in (spot) current market. Green includes all the calls and put options data available. If you are not aware of how option trading works learn here. In orange box different strike price, and in black box net change (change in premium price).
- In the image below, orange box reflects all call option data. Whereas at right side Put Option. On both sides of the strike prices, we have variety of data like OI (open interest), Change in OI, Volume, IV(Implied Volatility), LTP, Net Chng, Bid Qty, Bid Price, Ask Price and Ask Qty. Have you observed the data is given in different colours. Why some of the strike of call & put option is in pale yellow and rest in white?
To understand this we should be knowing moneyness of an option. For now just know that data in yellow part of call option is In the Money (ITM) while those in the white are Out of the Money (OTM). Where as data in yellow for put options is in the money and white out of the money. So for Call Options, strike prices lower than the current price of the underlying are highlighted. While for Put Options strike prices greater than the current price of the underlying are highlighted.
Basics of Option Trading In India:
Before we begin to understand all the terms present in option chain table, let us know basic of option trading and about Moneyness of an option contract.
There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options.
Basic of Call Option:
“The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (underlying) from the seller of the option at a certain time (expiration date) for a certain price (strike price). The seller (or writer) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (known as premium) for this right”.
Basic of Put Option:
On the other hand, 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 expiration date of the Option. Here again, the contract gives you the right but it is not mandatory for you to sell the underlying.
In other words If you’re buying a call option, it means you want the stock (or other security) to go up in price so that you can make a profit from your contract by exercising your right to buy those stocks (so that you can sell them to cash in on the profit). Opposite to this is put option perspective, he wants the price to decline to benefit. when you buy options you can either hold the option till expiry and let the exchange do the settlement for you this is called Exercising a contract or you can close the position before expiry and book profits/loss.
Moneyness of an option contract:
Moneyness in options can be define as the association between the strike price of an options contract and the price of the underlying security.The underlying price is the price at which the underlying asset trades in the spot market.This is current market price at which stock is trading in spot market .
There are three main classification that are used to describe the moneyness of an options contract.
In the money (ITM) – A call option is in ITM if its strike price is less than the current market price of the underlying asset. A put option is ITM if its strike price is greater than the current market price of the underlying asset.
At the money (ATM) – When the strike price of a Call or Put option is equal to the current market price of the underlying asset then it is in ATM.
Out of the money (OTM) – A call option is OTM if the strike price is greater than the current market price of the underlying asset. A put option is OTM if the strike price is less than the current market price of the underlying asset.
You might be thinking What is the purpose to know all this terms. As a matter of fact Even if you are just using very simple strategies like taking a single position, you still need to consider moneyness. Understand this every options trading strategy requires knowing what moneyness state the options you are buying or selling (writing).
For example, if you are buying contracts on an underlying security that you expect to move substanialy in price in a short time frame, then buying out of the money contracts would increase chances of your profits. On the contrary If you are expecting a smaller movement, then in the money contracts would probably works as a better &less risky .
In case you start using more complex strategies, moneyness becomes even more important. Another example,May be a strategy might involve buying in the money contracts and then writing out of the money contracts on the same underlying security.
How to read Options Chain?
What is Open Interest (OI) In Option Chain?
OI is an abbreviation for Open Interest. Open interest (OI) equals the total number of contracts, not the total of each transaction by every buyer and seller. In other words, OI is the total of all the buys or all of the sells, not both. To know OI in any market, we should know total of either buyer or seller not sum of both. By knowing the OI one can somehow know the trend in the market.
Besides this it also tells you about outstanding contracts of options in the market.Open Interest also indicates strength & weakness in a particular direction of market. It is a data that signifies the interest of traders in a particular strike price of an Option. Generally, the higher the open interest, the more a particular contract is traded and hence a higher level of liquidity. Learn More about Open Interest
Chng in OI: It tells you about the change in the Open Interest within the expiration period of a given security. Those contracts that are closed, exercised or squared off.
What is Volume In Option Chain?
Volume measures the number of transaction that took place on each options contract for that day. If a particular stock options contract is bought or sold 1000 times in a day, its volume will reflect 1000. Basically, higher the volume of a stock options contract, higher its liquidity. It is another indicator of traders interest in a particular strike price of an Option. Volume can help you understand the current interest among traders.
What is Implied Volatility (IV) in option chain?
In simple terms, implied volatility(IV) is the opinion of the market on the stock or index’s next potential move. If the implied volatility is high, the market thinks the security has potential for large price swings in both(up/down) direction. Where as low IV implies the stock will not move as much upon option expiration. It tells us about what the market thinks on the price movement of the underlying. Implied volatility does not provide a forecast with respect to market direction.
IV give you a sense for how volatile the market may be in the future, it can also help you determine the likelihood of a stock reaching a specific price by a certain time. That can be crucial information when you’re choosing specific options contracts to trade. Since most option trading volume usually occurs in at-the-money (ATM) options, these are the contracts generally used to calculate IV.
Other Basic terms in Option Chain Table:
- LTP: It is the acronym for Last Traded Price of an Option.
- Net Chng: Changes happening in LTP is termed as Net chng. The positive changes are indicated in green while negative changes, decrease in price, are indicated in red.
- Bid Qty: It is the number of buy orders for a particular strike price. This tells you about the current demand for the strike price of an Option.
- Ask Qty: It is the number of open sell orders for a particular strike price. It tells you about the supply for the Option.
- Bid Price: It is the price quoted in the last buy order. So a price higher than the LTP may suggest that the demand for the Option is rising and vice versa.
- Ask Price: It is the price quoted in the last sell order.
Fundamentalist and technical analysts also use the option chain data as an important data point as an authority for their view. Even for chartists, option chain data trends can be an additional evidence to be considered. Once you understand the option chain, choosing the best strike price becomes easy.
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