Home/Blogs/A guide to read Option Chain for newbies

A guide to read Option Chain for newbies

31 Jul 2023

Introduction:

If you are willing to trade in Futures and Options (F&O), you must know how to read an ‘Option Chain’. In the beginning, it may seem like a complex maze of data to you. But as you learn more about it, you will understand that an option chain contains in-depth information on all ‘Options Contracts’ available for eligible indices and stocks. 

In this blog, you will learn an option chain and how to read it to identify trading opportunities. Let’s get started.

Start Investing with Free Expert Advice!

What is an Option Chain?

An option chain is a list of all options contracts available for Nifty, Banknifty, or other indices and stocks. You must know that not all stocks have options, but the real-time data is presented in an option chain for those that have.

What are the various components of an Option Chain?

Understanding various components of an option chain is crucial to learning the art of reading it. Let’s read about them one by one:

  • Options Type

Typically, there are two types of options contracts – Call Options and Put Options. A call option gives you the right but not the obligation to buy a specific quantity of underlying securities at a specific price within a specified date (known as the expiry date of the contract).

On the other hand, a put option gives you the right but not the obligation to sell a specific quantity of underlying securities at a specific price within a specified expiry date.

  • Strike Price

The strike price refers to the price at which you will need to buy or sell the underlying securities in case you want to exercise your options contract. An options trade becomes profitable when the price of the options contract goes beyond the strike price.

  • Open Interest

Open Interest (OI) reflects the interest of traders in a particular strike price. A high OI denotes that many traders are interested in an options contract. Such an option will have liquidity and you can buy or sell it whenever you want.

  • Change in OI

Change in OI denotes how the OI for an options contract has changed within its expiration period. If there is a significant change in OI, it means that a large quantity of an options contract has been closed, executed, or squared off.

  • Volume

Volume indicates the total number of options contracts for a specific strike price traded in the market. Like OI, ‘Volume’ can be used to calculate the current interest of traders in a particular contract.

  • Implied Volatility

Implied Volatility (IV) reflects the volatility in the price of an options contract. A high IV value means a particular options contract is experiencing high volatility, and vice versa. 

  • Last Traded Price

Last Traded Price or LTP is the price at which an options contract was last traded in the market. Any changes in the current market price with respect to the LTP are shown as “Net Change”.

  • Bid Quantity and Bid Price

The total number of buy orders for a specific strike price of an options contract is known as the bid quantity. It reflects the current demand for an option. The price quoted for the last buy order of an options contract is known as the bid price.

  • Ask Quantity and Ask Price

The total number of open sell orders for a specific strike price of an options contract is known as the ask quantity. It reflects the availability or supply of an option. The price quoted for the last sell order of an options contract is known as the ask price.

Understanding ITM, ATM, and OTM

  • If the strike price of a call option is less than the current market price of the underlying security or if the strike price of a put option is higher than the current market price of the underlying security, an option is considered to be ‘In the Money’ or ITM.
  • If the strike price of a call or put option is adjacent to the current market price of the underlying security, an option is said to be ‘At the Money’ or ATM.
  • If the strike price of a call option is greater than the current market price of the underlying security or if the strike price of a put option is less than the current market price of the underlying security, an option is considered to be Over the Money or OTM.

Generally, ITM contracts are highly volatile, whereas OTM contracts remain stable. Most of the trades happen in the ITM window, which is highlighted in an option chain.

To conclude

A deep understanding of an option chain can help you make informed trading decisions that decide whether you will make or lose money in options trading. The more you practice, the more you learn to read an option chain. If you need a Demat account to start your F&O trading journey, you can open it for free with Motilal Oswal.

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C