How to do an option chain analysis?

The option chain analysis is also considered the options matrix with a list of multiple potential options. When you begin to trade with options, you might get overwhelmed.

The options chart looks like rows of random numbers, but it has something more than that! It provides multiple valuable pieces of information for maintaining security and safety. 

Not every public stock contains options, but the information is presented in real-time constant order for the stocks that contain options. By learning the language of the option chain, investors can become more informed.

For getting a brief understanding of making and losing money in the options market, this blog will be helpful to you. If you want to become an expert in how to read option chain data analysis, let’s get into the brief.

Understanding the Option Chain & its way of analyzing

The option chain analysis is the matrix used to analyze the put and call strike price trading tasks. This is used for understanding the open interest rate, the average cost of the particular series, and the premium chart options.

To check the option chain for a particular instrument, you must visit the NSE website or StockEdge. Let’s go through some straightforward points to understand option chain analysis for intraday!

• The option chain contains 2 sections where one is called calls, and another is called puts. The call option suggests the best option to buy a stock, whereas the puts option suggests the right to sell a stock.
• The cost of an option contract is termed as premium, which is figured out as the upfront cost. The investors pay the cost of purchasing the option.
• The options strike price is the stock price that the investors purchase.
• The options list contains expiry dates that impact the option’s premium. From this list, you can check out the expiry series. Make sure that the list also contains the monthly and weekly expiries of Bank Nifty & Nifty.
• The individuals who buy calls have all the rights but are not obligated to purchase the contracts. The buyer will receive a profit if the cost exceeds the strike price. In case the price goes down below the range of the strike cost, then you will receive a loss that is equal to the premium paid.
• Similarly, put offers all the rights for selling an asset but not the obligation for selling it at a particular strike cost. If the cost goes under the strike price, the put buyer will get benefits. The loss will be acquired if the cost goes above the strike cost.

By concluding the above points, we can say that certain parameters exist to evaluate the option chain rate. The major parameters are open interest, LTP, volume, and the strike price of both call and put options.

Things to understand before doing the option chain analysis

The options contracts must influence the investors to purchase and sell a security at a preset price. The options are considered derivatives because it delivers value.

• Calls and Puts: We have already discussed this part in the above section of this blog. The call options are always listed in the top position. Both the options give rights but not the obligations to buy and sell stocks at a certain price within a certain date.
• Expiration Date: The options contain multiple expiry dates. To understand this in brief, let’s assume you could start buying the call option of a stock that expires in April & July. Options less than 30 days to expiry lose value quickly because of less execution time. Every options contract has its symbol, just like any other underlying stock. The option chain contains the columns as per the order of strike rate, symbol, change, last, Bid, volume, ask and open interest.
• Strike price: The strike price is the cost you can buy or sell. The call option, which has a higher strike price, is the most cost worthy than the lower strike calls. The market price should cross over to the strike price for the execution.
• Premium: This is termed as the last price, which is mostly posted trade. The change column in the options chart shows the trade fluctuations rate based on the closing price. The column of the options chart contains the Bid and asks that show the cost of buyers and sellers, respectively.
• Fluctuation: The premium rate of options fluctuates on a rapid basis. It fluctuates when the cost of underlying stock changes. The fluctuation rate is also known as the volatility that impacts the likelihood of an option.
• Open Interest and Volume: This column in the options chart is used to show the amount of how many options outstanding. The in or out-of-the-money options are also measured for evaluating the option chain analysis.

Open Interest (OI) refers to the currently outstanding contracts in the market. It signifies the interest of traders during a particular strike price. If a new position is initiated by both the buyer and seller, the OI rises by 1, and if they exit the contract position, the OI then falls by 1.

In another scenario, if the buyer and seller pass their position to a new buyer or seller, the open interest does not change.

Support and Resistance in OI

The support and resistance lines help the traders to know their point of entry and exit in a stock. When the open interest is high for a call option at a specific level, it means resistance at that strike price, and when there is high OI in the puts option at a specific strike price, that implies support at that price.

Example: Option chain
Asian Paints – Market price as of 23^rd December 2022 – ₹ 3053

To look at the option chain more closely, let’s take an example.

Above is an option chart of Asian Paints, whose current share price (as of 23rd December 2022) is ₹3,053. On the left side is the calls section and on the right side is the puts section. In the middle of the chart, we have the strike price.

As we see in the above table, the most volume of trading is in the strike prices closest to the current market price. The strike price of 3000 has the highest volume of Puts, while the strike price of 3100 has the highest volume of Calls.

Bottom Line

To conclude, investing in the stock market requires a lot of fundamental and technical analysis. The technical analysts use the option data to understand the trend and the market’s short-term support and resistance. If you want to make consistent money from stock market then, you should check out this blog post.

The price of a share changes every minute of the market hours for any reason thus before trading in stocks, proper research must be done, and the trader should be vigilant.

The use of option chain analysis helps traders know the current ask price, ask quantity, bid price, and quantity of stock. This tool of option data should be used cautiously as there are chances that it may fail.

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