Friends, today we will know what is option chain, how to understand option chain, how option chain works, how to do option chain analysis, What is known by looking at the data of option chain, and how to earn money from option chain? I will explain all these topics in detail, if you still do not understand anything, you can ask in the comments.
What is Option Chain
Option chain is a very powerful tool in options trading, seeing which many traders trade in options.
Friends, when we step into the world of options trading, we come to know about many new things, by looking at which you can find out when the prices of options can go up or down.
One of them is ‘Option Chain’ which can prove to be very effective for you to be successful in option trading.
Very big traders do trading only by doing option chain data analysis, it means that if you also learn to read and analyze option chain data, then you too can earn good money by trading through option chain data.
What is option chain?
“An option chain is a chart that displays data for call and put options of different strike prices. By doing option chain data analysis, you can increase your trading accuracy. Option chains act as a powerful tool in F&O trading that gives you all the necessary data in one place.”
Understanding option chain is very scary for some people because when we go to the NSE website for the first time and see the data of option chain, we see a lot of numbers, which can scare any new trader. There is absolutely no understanding of the option chain.
But don’t worry today I will explain you option chain in such a simple language that after reading this post you will not need to ask anyone what is option chain.
For now, just understand that the option chain is such a data that can help in increasing your trading accuracy, meaning if you learn to analyze the option chain data well, then most of your trades will be profitable.
How does option chain work?
Option chains act as a powerful tool in share market trading and are used by top traders. Through Option Chain you can see a lot of important data at one place which helps you a lot in intraday trading or option trading.
How to View Option Chain Data?
- To see the option chain data, you have to first search on Google by writing ‘NSE option chain’.
- The first website you will see of NSE, click on it.
- Now the main page of NSE Option Chain will be opened.
- On the left side you will see ‘View option contract for’ From here you can see the data of the complete option chain of indices like NIFTY, BankNifty etc.
- If you want to see the option chain of a stock, then next to it you will see the option ‘Select Symbol’ from which you can select any stock and see its complete option chain data.
So in this way, you can easily see the option chain data of Nifty, BankNifty or any other stock.
Let us now know how beginners can understand option chains-
How to understand option chain?
In order to understand the option chain, you have to understand the strike price very well. First of all the question should come in your mind that there are two words in the option chain, ‘option’ and ‘chain’ option, so we all know that there are two types of options – call option and put option.
But why the word chain is added to it?
The word ‘chain’ has been added to the option chain because a lot of data of Call and Put options appears to us in the form of a chain whether it is strike price, volume, open interest, Bid Ask Qty, all these data A complete chain is formed that is why it is called an option chain.
The call and put options that you trade in option trading have multiple strike prices and against each strike price different data is displayed like – Volume, open interest, IV, Bid Qty, Ask, Qty, change in OI etc.
Like the current price of Nifty or Bank Nifty is called ATM i.e. At The Money option in the option chain.
Suppose now Nifty is running at 18200, then its ATM strike price will also be 18200.
But apart from ATM, there are ITM (In the money) and OTM (Out the money) strike prices as well.
Like if the market is currently running at 18200 then their OTM will be 18300, 18400, 18500, 18600, 18700 These are all OTM strike prices which form a very long upward chain.
Similarly, the ITM of the same 18200 NIFTY will be 18100, 17900, 17800, 17700, 17600 all these are the ITM strike prices which form a very long chain in the downward direction.
And ATM (At the money) is kept in the middle of the option chain data.
When the price of Nifty changes in the live market, its ATM, ITM and OTM also change.
In front of all these ITM, ATM and OTM strike prices, you can see different open interest, volume, bid price, ask price, etc. of all strike prices.
In this way, a huge chain of all these data is formed and that is why you see many numbers in the data of the option chain, because in front of each strike price, there are different rows and columns, in that strike price has its own separate data appears.
What comes in option chain?
There are two sides of Call and Put in the option chain data. The column with Strike Price is in the middle and you can see the data for the Left side Call option and the Right side for the Put option.
To understand the option chain well, first of all you should know about all the data that you see on the option chain chart.
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What does looking at option chain data reveal?
By looking at the option chain data, you can find out in which range the market will trade today, whether nifty or banknifty will go up or down, apart from this, by doing option chain data analysis, you can also get to know many important support and resistance levels.
Apart from this, by looking at the option chain data, you get to know that how many people are sitting on which strike price and what is the going rate of that strike price and what is the open interest on that strike price.
If you want to know the support and resistance level by looking at the option chain, then you can follow the steps given below –
- First of all, you need to find the strike price which has the highest open interest (see both call and put sides).
- Try to find the strike price which has the highest open interest closest to the strike price at which the market is moving.
- After seeing the strike price with more open interest, you will come to know that it is difficult to go higher than that means you can ask for resistance, this is the first resistance, similarly the strike price with open interest just less than this strike price will be the second resistance.
- Similarly, you can find support on the put side by looking at the strike price with the highest open interest.
- But keep in mind that in both of these, you have to see the current market price i.e. open interest near ATM.
What is Option Chain Analysis?
The analysis of open interest of strike price is called option chain analysis. In order to do option chain analysis, you have to carefully analyze the open interest of different strike prices.
Let’s understand that-
How to do Option Chain Analysis?
To analyze the option chain data, you have to analyze each and every piece of data in the option chain in detail. To analyze the data of option chain, I have listed some important points below which you must consider.
Let me tell you in advance that the points given below may seem a bit advanced and complicated to you, that is why you can skip it and move on to the next section-
- See if the change in open interest (CHNG IN OI) is more in calls or puts.
- See whether the IV of the call is higher or the put, buy the higher IV.
- Do not go to the side whose IV is less. If IV is breaking it means OPTIONS are being sold.
- Change in OI See if there is more change in calls than in puts, then find out the PCR (Put Call Ratio) of both… If it is more than 1 then you can buy.
- Keep in mind that you have to combine the data of only a few strikes to extract the PCR.
- Keep an eye on how much data is changing in every 5 minutes.
- Look at the PCR slope, if there is an uptrend then buy calls and if there is a downtrend then buy puts.
- Some stocks like – Tata steel, reliance, hidalco, ICICI bank have good liquidity.
- So option chain analysis works very well in stocks that have high liquidity.
FAQs About What is Option Chain ?
How does option chain help in trading?
For trading, Option Chain provides a lot of useful data at one place like; Different strike prices of call and put options, their premium amount, volume, open interest, bid ask price, etc, which help a lot in trading.
What do you know by looking at option chain?
By looking at the option chain, we can easily find out in which range the market will move today, what will be the support and resistance levels, how much is the volume and whether the market is more buyers or sellers.
Conclusion What is Option Chain ? How to understand option chain?
In this article (What is Option chain), I have told you what is Option chain, how does Option chain work.
If you are a beginner in options trading, then you must have got to learn a lot from this post.
I have tried my best to explain you about the option chain in easy language through this article. Hope you would find the information given in this post useful.