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How to make the best use of the Options Chain data for Futures and Options trading

11 Sep 2023

Option chain data is the complete picture pertaining to option strikes of a particular stock or index in a single frame. In the Option chain frame, the strike price is at the centre and all data pertaining to calls and puts on the same strike are presented next to each other. Normally, the calls are on the left side of the option chain and the puts are on the right side of the option chain. The option chain not only captures the price and volume data but also more analytical parameters like the shifts in open interest (OI), shifts in implied volatility (IV) etc.

NSE option chain data requires careful analysis if you are an investor looking to invest in the National Stock Exchange. As an investor, any money that you are about to allocate to the stock markets requires careful consideration before you take investment decisions. As the markets may move quicker than your pace of expectations, and fast decisions are a must, you must know about the option chain frame components at the back of your hand so opportunities are not lost out on. 

Key components of the option chain frame

The key to understanding the options chain data analysis lies in grasping what an option chain is in the first place. Sure, you may have guessed that it has something to do with futures and options trading, since the word “options” is present, but it's about more than this. An options chain is referred to as an options matrix at times. It is essentially a list that comprises all the probable options contracts that are available for a specific security. In a particular period of maturity, the list shows all puts and calls listed, dates of expiry, strike prices, and pricing and volume details pertaining to one underlying asset. You can become an expert at reading the list and making it an effective and efficient analytical tool for trading in futures and options.  Once you know about the parts in the chain, any option chain, Nifty 50 or NSE, is not hard to decipher.

Before understanding how to read the option chain data in NSE or Nifty option chain data, let us first look at the key components of the option chain. An option chain trading strategy can be formulated by seeing accumulations in OI (open interest) and volumes in various option strikes. You should note, here, that open interest implies the number that tells you how many options or futures contracts are presently outstanding/open, within the market. You must remember, throughout your evaluation of a chart, that there are two sides in any trade - a person who is the buyer, and the other is the seller. It is also crucial to know that the strike price is the price of an option at which a call or put action is undertaken. This is important for you to understand as it tells you when to act and how in options and futures trading. 

There are two ways to approach the option chain data. There is the index approach which tells us not only about trading the index but also about the market as a whole. Similarly, then there are the sectoral indices which are very useful in giving us cues about the attractiveness or otherwise of the particular sector in question. Furthermore, there are stock specific option chains which are useful as an added analytical screener before taking a final decision on buying or selling a stock. This option chain analysis can be used as an additional level screener for stock decisions. In a general way, you can have an overall view of whether a stock is worth the purchase or not, and you can either deal with an options or futures contract based on this. 

Also Read: How to make the best of your intraday margins while trading?

Interpreting Nifty Options Chain/Nifty Option Chain Analysis

                                Data Source: NSE

The above option chain pertains to the Nifty options of the various strikes. Here is how to interpret this index options chain. You can see an options chain of any specific instrument you require if you go to the Nifty website or any website that pertains to the stocks you would like to view in a particular index. Therefore, by going online, data is available to you to use and analyse quickly. 

It gives you a quick and rapid picture of in-the-money and out-of-the money options. While the strikes shaded in yellow are the ITM (In the Money) options, the un-shaded strikes are the OTM (Over the Money) options. This rule applies to calls and to puts.

The option chain allows the trader to evaluate the liquidity and depth of each specific strike. The option chain does not only capture the executed price but also captures real time bid price, ask price, bid quantity and ask quantity. When you combine these, you get a clear view of depth and liquidity in each strike and also overall.

The Nifty option chain can be used as an advance warning system of sharp moves or break outs in the index. Thus, you get warnings of volatility in the index in advance. More so because large institutions are more active in index options and they account for over 70% of daily trading. The sudden spurt in OI of a particular strike or the reduction of OI at a strike is indicative of much focused action in the Nifty. This can be a useful pointer for traders.

Traders can use this option chain to evaluate action in deep OTM calls and puts. Normally, sudden spurt in action in deep OTM calls and puts is indicative of a breakout in that direction. The large institutions with their large networks and high-end research may have seen a trend in the Nifty much before the others. You can get such cues through the option chain. The IVs can be used to substantiate these findings.

If you are a beginner in options and futures trading, the chart pertaining to options chains may seem like a complicated maze. There is a lot of data to view and evaluate. However, if you browse across data websites and other portals, you will discover that options chains are often the subject of several trader-led discussions and these apply to an NSE option chain, Bank Nifty chain or any other index. While you are reading charts on option chains, you must not forget that the strike price is the main determining factor about whether an option position will be profitable or not.

Also Read: Options Chain decoded for all types of investors

Using Stock Options chain data

                                      Data Source: NSE

Compared to the index option chain, the stock option chain does not give macro level indications. But stock option chain can be useful as a stock level indicator. Here are insights you can glean from the stop option chain.

For a trader, this is the best single shot view of all the strikes in the market on a particular stock. Which strikes are liquid and which strikes carry basis-risk can be judged with this sheet. That becomes a useful input for options traders.

How is the hedging on the stock actually happening? That can be judged by the options data. Normally, institutional investors tend to hedge their risk in a stock by buying put options or they hedge their short futures with call options. The option strike analysis shows you at what price traders and investors are getting sceptical about a stock.

The option chain helps to define a range for the stock. Normally, the price limits of a stock are within the range where the incremental option accumulation is the maximum. For traders, this can be a good way to determine the range of the stock.

Option chain gives you a single view on the economics of straddles and strangles at different strike prices. In the event of volatile expectations, one can buy strangles and in the event of range-bound expectations one can sell strangles. The option chain allows a quick analysis of strangles at various strikes and one can substantiate the view with other data pertaining to IVs and OI.

What is cooking in a stock? You can use the option chain to catch a scent of some positive or negative announcements that could be likely. Is their sudden spurt in volumes and OI in deep OTM calls or deep OTM puts? This can be a signal for you to probe deeper. More importantly, this can work as a last level screener for your stock buying and selling decisions.

Option chain is a useful tool not only for option traders but also for cash market traders. This is true of stocks and of indices!


Relate Articles: 7 Best Bearish Futures and Options Trading Strategies | How to Plan, Analyse and Execute Future and Options Trades | Myth and Reality of Option Trading 


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