Option Chain Analysis

An options chain is a listing of all available options contracts for a particular stock or index. It provides important information such as the strike prices, expiration dates, and premiums for call and put options. Here are some frequently asked questions (FAQs) about option chains with simple answers:

What is an option chain?

An option chain is a table or list that displays the available options contracts for a specific stock or index.

What are call-and-put options?

Call options give the holder the right, but not the obligation, to buy an underlying asset at a specific price (strike price) before a certain date (expiration date). On the website, Left side data belongs to Call data such as Call OI, Call OI change, etc.

Put options give the holder the right, but not the obligation, to sell an underlying asset at a specific price (strike price) before a certain date (expiration date).On the website, the Right side data belongs to Put data such as Put OI, Put OI change, etc.

What is a strike price?

The strike price is the predetermined price at which the Option holder can buy or sell the underlying asset. On the website, Strike Prices are located in the centre of the Option Chain table.

What is the expiration date?

The expiration date is like a deadline for an options contract. It's the date when the option becomes invalid and can no longer be used.

Traders can choose the expiration date they want to see by using the dropdown box at the top left of the screen. Index options have both weekly and monthly expiration dates available, while stocks typically have only monthly expiration dates. So, depending on the type of options and the asset being traded, traders can select the specific expiration date that suits their trading strategy from the options provided.

What does the LTP represent?

The LTP (Last Traded Price) is the price paid to purchase an options contract. It represents the cost of the option. On the website, LTP is located next to Strike Prices left side LTP option is for the Call side and the Right Side LTP option is for Put Side.

How is an option chain organized on our website?

An option chain is like a table that shows different choices for buying or selling options on a stock or index. In the middle of the table, you'll see the strike prices. On the left side, you can find information about call options like LTP, Change in LTP, IV, OI in lakhs, Change in OI and Volumes. You can also choose to see additional values called Greeks by clicking on the settings button at the top right of the screen. On the right side of the table, you'll see the same kind of information, but for put options instead. It helps traders make decisions about which options to trade and understand the market better.

How can I read an option chain?

Locate the desired stock or index in the option chain by selecting the stock name and expiry date from the dropdown box which is given at the top. Identify the strike prices and expiration dates that suit your trading strategy. Look at the premiums to determine the cost of buying or selling the options. By looking at the Open Interest data, traders can identify where the big players are sitting.

What is open interest?

Open interest represents the number of outstanding contracts for a particular option. It indicates the level of market participation and liquidity.

What are Option Greeks?

Option chain Greeks are key indicators used in options trading to understand the behaviour and pricing of options contracts. Greeks such as Delta, Gamma, Theta, Vega, and Rho provide insights into factors like price movement, time decay, volatility impact, and interest rate sensitivity, aiding in trading decisions.
Traders can easily view Greek values by enabling the Greek buttons located in the settings section at the top right corner. They can also enable or disable other functions like PCR (Put Call Ratio), Open Interest (OI), and Volumes based on their specific needs. This flexibility allows traders to customize their option chain display according to their requirements.

DELTA : It is the change in the price of an option resulting from a change in the underlying asset. It ranges from 0 to 1. At the money have a delta close to 0.5 For call options, the delta ranges from 0 to 1 and is represented as a positive number. A delta of 0.50 or 50 means that if the underlying index increases by 100 points, the call option's price will increase by 50 points.
For put options, the delta ranges from -0 to -1 and is represented as a negative number. A delta of -0.50 or -50 means that if the underlying index decreases by 100 points, the put option's price will increase by 50 points.
Let's take an example with Nifty Spot at 19500 and a call option with a strike price of 19500 CE at 120 rupees. If the call option has a delta of 0.50 or 50, and the option's price is 120 rupees, if the Nifty spot price increases by 100 points to 19600, the call option's price would increase by 50 points (delta of 0.50 x 100), resulting in a rise of 170 rupees.
If the delta were 0.70 or 70 instead, the call option's price would have increased by 70 points, leading to a rise from 120 rupees to 190 rupees.
In simple terms, delta helps us understand how much an option's price will change based on changes in the underlying asset's price. It allows traders to estimate potential gains or losses as the underlying asset's price moves.

GAMMA : Delta is not constant, it changes as the price of underlying moves. Gamma measures a change in the delta of an option in response to a change in the price of an underlying asset.
For example, let's say we have an XYZ stock with a stock price of 450 rupees. And XYZ stock 560 Call Option priced at 10 rupees.
Let’s assume that the option has a delta of 0.40 and a gamma of 0.01
When the stock price increases to Rs. 451, this is what happens:
Option price moves by 0.40* Rs. 1 = Rs. 0.40 (delta multiplied by the difference in price). The new price of the call option becomes Rs. 10 + Rs. 0.40 = Rs. 10.40.
And delta becomes 0.40 + 0.01 = 0.41 (delta increases by the extent of the gamma).
If gamma had 0.02
Then the delta would become 0.40 + 0.02 = 0.42

THETA : Theta represents the time decay of an option contract and specifies the time value or extrinsic value. The call put option loses its value every day as it approaches expiry.
Looking at an example, imagine you buy a call option which is priced at 2 rupees with a strike price of 50 rupees that expires in 30 days. The underlying stock is currently trading at 48 rupees.
Now, let's say this option has a theta of -0.05. This means - all else being equal - the price of your option will decrease by 0.05 rupees each day due to time decay.
So, after one day, if all the other factors remain unchanged, your option might be worth 1.95 rupees (down from the initial 2.00 rupees). And after two days, it would theoretically be worth 1.90 rupees However, theta decay can accelerate as the option gets closer to expiration, which is something to keep in mind.
As an options buyer, theta is theoretically working against you, eroding the value of your option with each day that passes. But if you were the one who sold (i.e. wrote) the option, theta would theoretically be working in your favour, making the option cheaper to buy back if you wanted to close your position.

VEGA : Rate of change in the price of an option due to the change in the implied volatility. The higher the volatility higher the probability of large price moments.
Vega is typically expressed as the amount of money that an option's value will gain or lose when volatility rises or falls by 1%.
For example, imagine a trader owns a call option with a vega of 0.05. That means that for every 1% increase in implied volatility, the option's price is expected to increase by 0.05 rupees, assuming all other factors remain constant.
On the other hand, if implied volatility were to decrease by 1%, the option's price would be expected to decrease by the same amount.
Now assume the stock option is currently priced at 2 rupees with an implied volatility of 20%. If the implied volatility of that option were to increase from 20% to 21%, the value of the option would theoretically increase from 2 rupees to 2.05 rupees, all else being equal.

RHO : Rho measures the change in the price of an option relative to the change in interest price.
Let us take a simple example to illustrate the concept of Rho. Imagine that there is a call option priced at 5.00 rupees and it has a rho equivalent of 0.5 rupees Now, if the risk-free interest rate increases by 0.5% (from 2.5% to 3.0%), then what will be the impact on the value of the call option?
Theoretically, every 1% increase in an interest rate should increase the value of the call option by 0.50 rupees. In this case, the interest rate increased by 0.5%, so the value of the call option should increase by 0.25 rupees (= 0.5%/1% * 0.50 rupees). So, the new value of the option would be 5.25 rupees.

How to Use Option Chain?

Here are some pointers on how to use the NSE Option Chain table effectively:

Analyze strike prices : Identify key levels where market participants are showing interest in buying or selling options.

In-The-Money (ITM) : A call option is in ITM if its strike price is less than the current market price of the underlying asset. A put option is ITM if its strike price is greater than the current market price of the underlying asset.

At-The-Money (ATM) : When the strike price of a Call or Put option is equal to the current market price of the underlying asset then it is in ATM.

Over-The-Money (OTM) : A call option is OTM if the strike price is greater than the current market price of the underlying asset. A put option is OTM if the strike price is less than the current market price of the underlying asset.

Examine option types : Differentiate between call and put options to understand the market bias. If the Option buyer, predicts the asset will go Up then he will choose to Buy the Call Option and if the trader predicts that the asset will go down then he will choose to Buy Put Option and earns a profit.
Let's understand from the seller's point of view, If a seller predicts the Index/stock to go up then Seller writes the Put Option (sells the put option) and if a seller predicts the asset to go down then Seller writes the Call Option (sells the call option)

Consider open interest : Look for strike prices with high open interest to identify potential support or resistance levels.

Review volume : Evaluate the liquidity and activity levels of specific options contracts.

Option Chain Interpretation?

The option chain is an important source of data for options trading. It provides information like open interest (OI), trading volumes, changes in OI, and other values called Greeks.
In the option chain, the strike prices are shown in the middle, with Call data on the left side and Put data on the right side.
Let's take the example of the option chain for Nifty 50 with an expiry date of 13/07/2023. Let’s interpret on the basis of Open Interest On the right side, you can see the total Open Interest and the change in Open Interest for the Put options. On the left side, you can see the Open Interest and Open Interest Change data for the Call options of that expiry.
By looking at the data, you can observe that the 19500CE strike price has the highest Open Interest. This means that many traders have shorted the 19500CE option, indicating a strong resistance level for the market. Similarly, the 19400PE strike price has the highest Open Interest for Put options, which suggests a strong support level.
Based on this information, we can expect the market to stay within that range until expiration. However, if Nifty crosses the 19500 level and sustains above it, the traders who shorted the 19500CE option may panic and cover their shorts. This could lead to short covering in the market and a potential rise in Nifty to higher levels.

How to Track Changes in Open Interest Using Option Chain?

To track changes in Open Interest using an option chain, you can compare the Open Interest data over different time periods. By regularly monitoring the Open Interest values for specific strike prices, you can see if there are any significant increases or decreases. A rising Open Interest suggests new positions are being created, indicating potential market sentiment. Conversely, a decline in Open Interest may indicate traders closing their positions. Analyzing these changes helps you understand market trends and identify potential shifts in investor sentiment.

How to Analyze Option Chain for Trading Decisions?

Analyzing the option chain for trading decisions involves a few key steps. First, identify strike prices with high open interest (OI) and trading volumes, indicating significant market activity and potential support or resistance levels. Pay attention to changes in OI to understand if new positions are being opened or closed. Evaluate the Greek values (Delta, Gamma, Theta, Vega, and Rho) to assess options' sensitivity to price, time, volatility, and interest rates. Consider the overall sentiment and trends reflected in the option chain. By combining these factors, traders can gauge market sentiment, identify potential price levels, and make informed decisions about options strategies, such as buying, selling, or hedging. Traders can manage their Risk also by analysing the Option Chain data.