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Option Chain

Option Chain

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About Option Chain

What is an Option Chain?

An option chain shows all the available call and put options for a stock or index in a table format. It helps traders quickly compare different strike prices, premiums, and key data points before placing a trade. This tool is crucial because it helps traders identify the best possible entry and exit points based on current market conditions.

The chain is divided into two sides (one for calls and the other for puts) with the strike prices listed in the centre.

You’ll usually see:

  • Last traded price (LTP)
  • Bid and ask prices
  • Open Interest - total number of outstanding contracts
  • Volume and open interest
  • Implied Volatility

This tool is widely used in options trading to assess market trends, price levels, and to build simple or advanced strategies.

How to read Option Chain & analyse it?

An option chain shows all the available option contracts for a particular stock or index. It is usually divided into two main parts: Call Options on the left and Put Options on the right. In the centre, you'll see a list of Strike Prices.

Key terms to know:

  1. Call Options: These give the right to buy the stock at a certain price.
  2. Put Options: These give the right to sell the stock at a certain price.
  3. Strike Price: This is the agreed-upon price at which the option can be exercised.
  4. LTP (Last Traded Price): This is the last price at which the option contract was bought or sold.
  5. Bid Price: The highest price a buyer is willing to pay for the option.
  6. Ask Price: The lowest price a seller is willing to accept for the option.
  7. Change: How much the option's price has moved compared to the previous day.
  8. Volume: The number of contracts traded on that particular day.
  9. Open Interest (OI): The total number of active contracts that are still open.

Now, how to analyse it? Start by checking which strike price is closest to the current market price. That is usually where the action happens.

Next, look at the Call side and Put side:

  • If the Call side has high open interest at a particular strike price, it often means traders see that as a resistance.
  • If the Put side has high open interest, it may act as a support level.

Now check the Volume. A sudden jump in volume means a lot of traders are taking new positions. This helps in identifying where market interest is building.

Lastly, compare the Bid and Ask prices. A narrow difference means the option is liquid and can be traded easily. A wide gap might mean less activity.

How to interpret Volume & Open Interest?

When you're looking at an option chain, Volume and Open Interest (OI) are two of the most important columns to understand. They tell you how active a particular option is and how many traders are interested in it.

Let’s break it down simply.

Volume shows how many option contracts were traded during the day. If the volume is high, it means a lot of traders are interested in that strike price. Low volume often means the option is not very active.

Open Interest (OI) tells you how many contracts are still open and not yet closed or squared off. High OI suggests a strong interest at that level. It shows where traders are building positions.

Looking at both together gives better insights. To keep it simple:

  • High Volume and High OI: Strong interest. That level could be important.
  • High Volume but Low OI: New positions are likely being created today.
  • Low Volume and High OI: Not much activity today, but still, many traders are holding positions.
  • Low Volume and Low OI: Not an active strike. Traders may be ignoring it.

Always compare volume with OI to get a clearer view of market activity.

Understanding Implied Volatility (IV) & Put-Call Ratio (PCR)

When you look at an option chain, you'll often see two terms that help explain what traders expect from the market. These are Implied Volatility (IV) and Put-Call Ratio (PCR).

Let's start with Implied Volatility, often called IV. Implied Volatility shows how much movement the market expects in the price of a stock or index. It does not say which direction, just how big the move might be.

If IV is high, it means traders think the price could jump or fall a lot. If IV is low, they expect smaller movements. For example, IV usually goes up before news events like earnings or a budget announcement because traders are unsure what will happen. Once the news is out, IV often comes back down.

Think of IV as a "fear and excitement meter." High IV means more tension or hype. Low IV means the market is calm.

Now let's move to the Put-Call Ratio, also called PCR. It is a number that compares how many put options are being traded versus call options.

It is calculated like this:

PCR = Total number of Puts / Total number of Calls

If the ratio is more than 1, it means more puts than calls. This often shows that traders are cautious or expect a fall. If the ratio is less than 1, it means more calls, which usually suggests a bullish or positive outlook.

PCR is useful to check the market's overall mood. But don't rely on it alone. Always look at it with other signals.

How to use an Option Chain?

Using the option chain can help you understand what traders in the market are expecting. You don't need to be an expert to get started. With just a few key ideas, you can begin using it to make better trading decisions.

Start by choosing a stock or index and opening its option chain. You'll see a list of strike prices in the middle. On one side, you'll see call options, and on the other, put options.

Now, here's how to use the information:

  1. Find support and resistance levels: Look at the OI column for both calls and puts.
    • If a strike price has very high OI on the call side, that level often acts as resistance.
    • If high OI is on the put side, it can act as support.
  2. Check for market sentiment: Compare how much interest traders have in puts versus calls. If there's more activity in puts, traders may be bearish. If there's more in calls, traders may be bullish. This can help you align your trades with the trend.
  3. Watch for sudden changes: A sharp rise in OI or volume on a strike price often shows a new trading opportunity. It may indicate that traders expect a big move soon. Combine this with price movement to confirm signals.
  4. Combine with charts: Option chain works even better when you combine it with charts. For example, if the option chain shows strong support at 18,000 and the chart also shows a bounce near that level, it gives you more confidence.
  5. Use for intraday or positional view: You can use option chain data to plan short-term or even longer-term trades. For intraday, watch how OI and volume shift during the day. For swing or positional trades, check how OI builds up over a few sessions.

Difference between NSE and BSE Option Chain

In India, options trading mainly happens on two exchanges: NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). While both offer option chains, traders usually prefer NSE due to better liquidity and volume. Here's a quick comparison to help you understand the key differences:

FeatureNSE Option ChainBSE Option Chain
PopularityMost widely used by tradersLess popular compared to NSE
LiquidityHigher liquidity and volumeLower liquidity and volume
Data UpdatesFaster real-time updatesMay have a slight delay
Market DepthMore active contracts across strike pricesFewer active strike prices

In simple words: If you are trading options in India, go with NSE. It has more action, better tools and quicker updates. BSE works too, but most serious traders stick to NSE for reliability and ease.

Key terms in Option Chain

If you're new to options trading, you might feel overwhelmed by the number of strategies out there. But you don't need to jump into complex setups right away. There are a few simple strategies that help you learn without taking on too much risk.

Let's look at some easy ones that beginners often start with:

  1. Covered Call: This is good if you already own a stock and want to earn extra money from it. You sell a call option on the stock you own. If the stock price stays below the strike price, you keep the stock and the premium. If it goes above, you'll have to sell your shares, but still keep the premium.
    Use when: You expect the stock to stay flat or go up slightly.
  2. Protective Put: This works like insurance for your stock. You buy a put option while holding the stock. If the stock falls, the put helps cover your losses. If it goes up, you still profit from the rise, but the cost of the put reduces your gains slightly.
    Use when: You expect the stock to go up, but want protection just in case it drops.
  3. Bull Call Spread: This helps you trade when you expect a moderate rise in stock price. You buy one call at a lower strike price and sell another call at a higher strike price. Your profits are capped, but so is your loss. It's cheaper than buying just one call.
    Use when: You believe the stock will go up a little, not a lot.
  4. Bear Put Spread: This is used when you expect the stock to fall a bit. You buy a put option with a higher strike price and sell another with a lower strike price. This strategy limits your risk and potential gain, making it a balanced trade.
    Use when: You think the stock will go down slightly, not crash.

Tips for beginners

If you are just starting to explore the option chain, it is completely normal to feel overwhelmed. But once you understand the basics, it becomes easier to follow. These simple tips will help you build confidence.

  1. Start with popular stocks or indices: Choose options that belong to well-traded stocks like Nifty, Bank Nifty, Reliance, or Infosys. These have good liquidity, which means you can buy or sell them easily without much price difference.
  2. Look at volume and open interest: Volume tells you how many contracts were traded during the day. Open interest shows how many contracts are still active. When both are high around a strike price, that level often acts like a wall. Prices may pause or reverse there.
  3. Check implied volatility and PCR: Implied volatility shows how much the market expects prices to change. The put-call ratio (PCR) helps you quickly see if traders are feeling more positive (bullish) or negative (bearish) about the market.
  4. Read the option chain every day: Even if you don't place trades, take time to read and understand the data. Over time, you will start to see patterns and learn how traders react to different situations.

Frequently Asked Questions

Choose a near expiry if you want quick trades with lower premiums. Pick longer expiry if you need more time for your view to play out. Match the expiry with your trade horizon.

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