Here are components of the options chart that will help you to read the options chain chart easily. Let’s look at the given below:
Options Type Typically, options have two different types:
a. Call Option
Call option means a contract that extends the right to buy underlying at a specific price within a specified date
b. Put Option
Put option is also a contract that extends the right to sell underlying at a specific price within a specified date.
Strike Price Strike price means a price at which both buyers and sellers of the Option agree to execute a contract. When the options price goes beyond the strike price, the options trade turns out to be profitable.
In-The-Money or ITM In-the-Money ATM is considered when the call option’s strike price is a smaller amount compared to the present market value.
Conversely, the put option is the In-The-Money ATM if the current market price is less than the stock price.
At-The-Money or ATM At-The-Money or ATM defines a situation wherein the strike price of a put or a call option is equivalent to the current market price of an underlying asset.
Over-The-Money or OTM Over-The-Money is considered when the strike price is more than the current market price of an underlying asset.
Similarly, on the other hand, if the strike price is lower than the current market price of an underlying asset, then the put option is said to be at OTM.
Open Interest or OI Open Interest means the Interest of traders during a specific strike price. The higher the amount, the Interest will be more among the traders for the actual strike price of an option. Since there’s more Interest among traders, there will be high liquidity to trade your opinion.
Change in Open Interest It shows all the significant changes taken place in the Open Interest before the expiration date. The significant difference in OI signifies that either contracts are closed, exercised, or squared off.
Volume The volume shows the trader's interest, and the total number of contracts of an option for a specific price traded within the market.
Volume is calculated daily and can even help understand the current Interest of several traders.
Implied Volatility or IV Implied Volatility showed the price swing. High Implied volatility means there will be a high swing in prices, and low implied Volatility means there will be few or low swings in prices.
Last Traded Option or LTP LTP means the last traded price of an option.
Bid Price Bid Price means the actual value quoted within the last buy order. A price above the Last Traded Price (LTP) may indicate rising demand for options.
Bid Quantity Bid Quantity is the total number of buy orders booked for a particular strike price. However, it tells you about the current demand for the strike price of an option.
Ask Quantity Ask Quantity is the total number of open sell orders for a particular strike price. It indicates the availability of the options.
Ask Price Ask Price is the value quotes within the last sell order.
FAQs
To study an option chain, focus on the current market price, displayed in the centre. Analyse the built-up data to understand market direction based on recent changes in open interest and price. ITM call options are typically highlighted in yellow, making it easier to distinguish them from other options.
What is the option chain? ›
Options chain can be defined as the listing of all option contracts. It comes with two different sections: call and put. A call option means a contract that gives you the right but does not give you the obligation to buy an underlying asset at a particular price and within the option's expiration date.
How to read options chart for beginners? ›
1 The order of columns in an option chain is as follows: strike, symbol, last, change, bid, ask, volume, and open interest. Each option contract has its own symbol, just like the underlying stock does. Options contracts on the same stock with different expiry dates have different options symbols.
How to read IV in option chain? ›
Implied volatility shows the market's opinion of the stock's potential moves, but it doesn't forecast direction. If the implied volatility is high, the market thinks the stock has the potential for large price swings in either direction, just as low IV implies the stock will not move as much by option expiration.
What is the easiest way to explain options trading? ›
An option holder is essentially paying a premium for the right to buy or sell the security within a certain timeframe. If market prices become unfavorable for option holders, they will let the option expire worthless and not exercise this right, ensuring that potential losses are not higher than the premium.
How do you predict option chain analysis? ›
You can start by knowing the meaning of different components in an option chain, like implied volatility, open interest, and volume. Once you understand the importance of different terms, it becomes easy to compare different contracts. Each component in this chain will provide a unique insight into the contract.
Which option strategy is best for beginners? ›
5 options trading strategies for beginners
- Long call. In this option trading strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. ...
- Covered call. ...
- Long put. ...
- Short put. ...
- Married put.
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.
Which chart is best for option trading? ›
The volume chart displays the number of options contracts bought or sold at each strike. Investors can use it as an indicator of market trends and option liquidity.
How reliable is option chain analysis? ›
Can we make accurate predictions using it for intraday in spot and future? Option chain analysis should not be done to predict stock movement in spot or future. I have tried it initially and failed and incurred a huge loss. Now, I use stock movement and do the option trading.
Implied volatility rank is generally considered to be elevated (i.e. “high”) when it is greater than 50. Extreme levels in IV rank would be 80 and above. Alternatively, when implied volatility rank is depressed (<20) that may be viewed as a potential opportunity to buy options/volatility.
How to read pcr in option chain? ›
PCR > 1: When the PCR is greater than 1, it suggests that there are more open put contracts than call contracts, indicating a bearish sentiment. Traders and investors anticipate the underlying asset's price to fall. PCR = 1: When the PCR is close to 1, it implies a balanced sentiment in the market.
What is the basic understanding of options trading? ›
Options trading is a type of financial trading that allows investors to buy or sell the right to purchase or sell an underlying asset at a fixed price, at a future date. Options trading operates on the basis that the buyer has the option to exercise the contract but is not under any obligation to do so.
How do you read options orders? ›
Bid – The bid represents the best available price that the option can be sold for. Ask – The ask represents the best available price that the option can be purchased for. Volume – Volume represents the amount of transactions that have occurred on the current trading day.
How do you analyze an option trade? ›
There are six basic steps to evaluate and identify the right option, beginning with an investment objective and culminating with a trade. Define your objective, evaluate the risk/reward, consider volatility, anticipate events, plan a strategy, and define options parameters.
