Whether you want to trade in options or you are trading options currently, if you are not aware about how to read option chain data and do proper option chain analysis, than chances of being profitable in trades are very low.
Reason being, option chain tells you the overall picture of the stocks or index you want to trade for intraday as well as weekly or monthly contracts.
Therefore, if you are serious about trading in options than you must understand the basics of option chain analysis. In this post we will be learning how to read option chain data and do analysis for Nifty, Bank Nifty, Stocks with examples.
Having said that, if you are a beginner in options trading than I would request you to first check out this amazing guide on options trading for beginners, you may find it long but you need to know trading in derivatives have certain complexities in comparison to normal equity trading, hence one need to cover all the aspects of options which may make the posts little lengthy.
But it does contain all the information one need to know about options from basic to advance. Let us now focus our attention back to option chain analysis.
Below is the step by step process to understand option chain in great detail covering all major aspects, so lets gets started.
What is Option Chain?
You can call an option chain as a catalogue or directory or list of all available option contracts ( calls or puts) for any stock, index, currency, commodities or any other financial instrument where options are traded.
The option chain table includes data about various factor affecting options contract directly or indirectly such as, Open Interest(OI), volume, Implied Volatility(IV), strike price, premium, Bid/Ask price etc. of a option contract for a given expiration date.
Keep in mind just as there is an option chain for the Nifty, banknifty which by the way are two most traded index on NSE (National Stock Exchange), you also have option chains for currency and commodity derivatives as well as for individual stocks where options trading is permitted.
Once you understand the option chain, your option trading strategy and mindset of selecting the strike prices like, In the Money (ITM), At the Money(ATM), Out of the Money(OTM) will certainly going to change. Know more about Option Moneyness here.
However option chain is relevant only when the contract is sufficiently liquid which we will understand later on in this post. Let us first see where and how to find option chain data, for reference we will use NSE website.
Where To Check Option Chain Data?
Gone are those days when you have to go to NSE Website in order to check the option chain data, now with advanced trading platform available by best discount brokers in India such as Zerodha, Upstox, Fyers, 5Paisa you get option chain data inbuilt in the trading platform itself.
However, I personally do prefer checking it on NSE website because of my habit, Let us go step by step to know where we can find the option chain list on NSE website.
- In the first place go to NSE India website, at the top of the website you will see in orange color the space for searching stocks. In orange color Equity will be written. Let us see how does it look like.
- At first we will see, how to search option chain data for any stock trading in FNO Segment. As you can see in the orange box, I kept it as equity and searched the name of the stock (SBI). By the way you can find the list of all FNO stocks on NSE here.
- Once you clicked the name searched, a new page will appear with all the statistics. You need to click on Option Chain at the top right as shown below.
- Once you click on option chain a new page will appear with all the option chain data included. In black box spot price of the stock i.e. the price at which the stock is currently trading in the market.
- You can also see expiry date of the contract highlighted in black box. On left hand side you can see all the call option data and on right put option data of SBI stock.
- I have marked the important observation to look for like in red box in middle is the different strike prices, In blue is the last trading price of the premium of the stock, in orange color is the volume and in green is the open interest.
- Apart from this there are many other data you can see such as IV implied volatility, bid/ask price, bid/ask quantity, change in open interest, net change in price of the premiums from last closing price etc.
We will discuss in great detail about all of them for now just make a thorough observation of what is where, another point is out of above the two most important data we will discuss first is open interest and volume as they are the ones who tells a lot about the directional view of any derivative.
Keep in mind the point discuss about the volume and open interest is only in terms of understanding the options contracts.
What Is Volume In Option Chain?
The term “volume” in trading indicate to the total number of shares that are traded in during a given period of time. That time can be of any frame (30min,1 hour, day, month, year).
The volume of trade is calculated on all types of financial instruments, including stocks, options contracts, bonds, futures contracts, commodities, etc.
Every transaction that takes place between a buyer and a seller of a security contributes to the total volume count of that security.
In trading terminology, volume is a kind of technical analysis used to know current or future trends and patterns for an individual stocks, options contracts, futures, index like nifty, bank-nifty or the entire stock market.
Volumes help you to find, how many shares have been bought and sold in a given period of time in reference to an individual stock, a consolidated group of stocks, or with the entire market under consideration.
You should look at volumes in case you want to find about the present perception of stock market participants (traders or investors).
Volume data for any security is easily available on your trading platform provided to you by your broker. Here how volume looks like on a trading software marked in yellow color:
As, you can see above there are various stocks listed, with different traded volume for the day. Before we dig deeper about the volume and its implication in stock market, let us know How volume gets calculated?
Stock market or for that matter any market works based on demand and supply, this demand and supply is created by buyers and sellers in the market.
Likewise, in stock market for all buyers, there has to be the sellers, so that the trade gets completed by changing quantity of shares bought and sold.
As an illustration suppose if you buy 100 shares of google at some price, and your friend sell 100 shares of google at the same price.
You and your friend together have created a volume of 100 shares in total. Many traders not only newbie, makes an assumption that volumes count for above will be 200 (100 buy+100 sell), which is wrong.
It’s critical to note that when counting volume, each buy/sell transaction is counted only once.
Check image above, orange box tells about the market timings, buy & sell quantity with cumulative (growing) volume its creating at every passing time during live market.
In total the volume that got created at the end of the trading session for the day is 300, basically for every buy/sell quantity its get added only once (300+300=300).
This happens in live market at every microsecond, because of this fight between buyers and sellers for the best price creates short-term price movement.
Volume information in isolation has no value, suppose you checked and got to know the volume in TATA Motors stock is 4,23,58,626.
What you will be going to do with this? However when you relate today’s volume information with the previous price and volume trend, then volume information becomes much more meaningful.
To read and interpret the volume correct way, one has to know the volume trend table listed below, take a look.
Above table clearly shows and inform you when to make an entry or exit while placing an order. Let us understand them one by one.
Price is increasing with increase in volume indicates bullish trend. But is it increase in volume of today, what is the reference point here?
So when you compare the volume you do it with the previous volumes aggregate. For example you can compare the today’s volume in relation to last 10,20,30 or 50 days. Recent sets of data is more relevant in comparison to older.
If there’s a higher volume at a particular strike price of an option contract, that generally means that traders are interested in buying or selling it. If volume and price are on the rise, it means the traders may have stake or betting on that strike price.
Whereas if volume is up but price is down, it means more traders are looking to sell. However retail traders thinking this as an opportunity to trade.
Also remember higher volume for a specific strike price of an option results in higher liquidity as we have discussed above.
Understand volume in reference to above volume trend table :
- If both Volume and Price Increases, it reflects the bullishness, stock may rise in further trading session. Look for buying option contract.
- Whereas, if volume are decreasing but stock price is increasing than, there are more retail participation rather than big traders. You need to avoid such situation as it might be a bull trap.
- Whereas if volumes are increasing but price of underlying (stock) is decreasing than bigger traders are selling, therefore view on stock should be bearish. One should look at selling option contract.
- If both volume and price are decreasing than it means the price is decreasing because of small retail participation, and not because of big traders are selling. Because if volume are decreasing it simply means there is no participation from big traders.
Volume is also decreasing as retailers are selling rather than big/smart traders. This situation can lead to bear trap, one need to avoid placing trade in such scenario.
A counter trade or position can be made, Stick with your trade if you are long (bought), but do not look for buying, you can go short but chances of trend getting reversed is more, so be careful.
Volume is another indicator of traders interest in a particular strike price of an Option. Volume can help you understand the current interest among traders.
I hope the above information about volume and its impact on options contract as well as overall stock market may have given you a new picture, you can read more about volume and volume based strategies here, now let us understand the next important factor which is Open Interest.
What Is Open Interest (OI) In Option Chain?
Besides this it also tells you about outstanding contracts of futures and options in the market. Open Interest also suggest strength & weakness in a particular direction of market.
Unlike volume which has significance in every part of stock market, open interest is only applicable to derivative segment(Fno).
As we know that market exist because of buyers as well sellers, in derivative contracts whether options or futures a buyer always known as long and seller as short.
If both parties to the trade are starting a new position as one new buyer and one new seller, open interest will increase by one contract.
If both traders (buyer & seller) decides to close their positions than open interest will reduce by one contract. Similarly if one old trader or buyer of contract passes of his position to a new buyer no changes happens in open interest.
Keep in mind that, open interest (OI) equals the total number of contracts, not the total of each transaction by every buyer and seller.
In other words, OI is the total of all the buys or all of the sells, not both. To know OI in any market ,we should know total of either buyer or seller not sum (addition) of both.
Check the image below for better understanding:
As you can see in the image above when there is a new position build by either buying or selling of contract open interest cease to increase by that quantity. Likewise, if both buyer and seller exit their position old position they have build earlier the OI will reduce.
Whereas, if there is addition of one new contract and exit by old contract the OI remains unchanged.
How to Calculate Open Interest?
As an illustration suppose there are 3 different traders named X, Y, Z. X buys 10 option contracts and Y buys 10 option contracts, while Z sells all of those 20 contracts. After this transaction, there are 20 contracts in total with 20 on the long side (10 + 10) and another 20 on the short side; hence the open interest is 20.
As stated above, OI is not the total of both buy and sell trades. Derivatives also called as “Zero Sum Game” because if you put +sign for long and -sign for short and add both contracts, the result would always be zero.
First thing to remember, We should know total of either buyer or seller not sum of both . Moreover OI just tells you about the open positions of contracts in market. OI helps in understanding about liquidity in the market . Higher the open interest, more liquidity in market .
Open Interest example:
On 27 Nov 2020, Open Interest of Nifty 50 index strike price 12,950 is around 97,950. It means that there are 97,950 Long positions and 97,950 Short positions for that particular strike price. Moreover about 4,125 roughly 4.40% new contracts have been added today. Check out the image below to better understand.
From top right in orange is the strike price 12950, in black is the expiry and option type(call) in red box is the premium at which the strike price is trading, in blue is the underlying value i.e.
Nifty50 currently trading at, and in green box is the open interest change in OI and below that is the Implied volatility (IV), Which has been discussed later in post.
Increase in OI means more money is flowing in to the market. As a result whatever will be the trend (up ,down , sideways) will continue.
Chng in OI: It tells you about the change in the Open Interest within the expiration period of a given security. Those contracts that are closed, exercised or squared off.
Check this table below for better explanation on a trader perspective about Open Interest.
Open Interest (OI)
If stock price increasing with high OI more trades will build on long side
Longs build up started unwinding or covering their position from market
Due to short build up stock price decreasing
As price increasing shorts covering their position from market
However a usual misconception of OI lies in its speculative ability. In no way it forecast price action whether high or low open interest shows investor or traders interest, but it does not mean that their perspective are correct or their positions will be profitable.
I hope now you have better understanding about What is OI? & purpose of it in option chain.
What is Implied Volatility (IV) in option chain?
In simple terms, implied volatility(IV) is the opinion of the market on the stock or index next potential move. If the implied volatility is high, the market thinks the security has potential for large price swings in both(up/down) direction.
Where as low IV implies the stock will not move as much upon option expiration. It tells us about what the market thinks on the price movement of the underlying. Implied volatility does not provide a forecast with respect to market direction.
IV give you a sense for how volatile the market may be in the future, it can also help you determine the likelihood of a stock reaching a specific price by a certain time. That can be crucial information when you’re choosing specific options contracts to trade.
Since most option trading volume usually occurs in at-the-money (ATM) options, these are the contracts generally used to calculate IV.
Other Basic terms in Option Chain Table:
- LTP: It is the acronym for Last Traded Price of an Option.
- Net Chng: Changes happening in LTP is termed as Net Chng. The positive changes are indicated in green while negative changes, decrease in price, are indicated in red.
- Bid Qty: It is the number of buy orders for a particular strike price. This tells you about the current demand for the strike price of an Option.
- Ask Qty: It is the number of open sell orders for a particular strike price. It tells you about the supply for the Option.
- Bid Price: It is the price quoted in the last buy order. So a price higher than the LTP may suggest that the demand for the Option is rising and vice versa.
- Ask Price: It is the price quoted in the last sell order.
- Strike Price: It represents the price at which the stock can be bought on the expiry day. As in above image we choose 12950 as strike price, which means on expiry or before whenever the price of Nifty 50 i.e. the underlying value in spot market goes above 12950 you can exercise your right to buy it (premium goes higher when the spot price of any stock or index go high except in some cases).
As we have covered all the data present in option chain table, it is time to revise the basics of option trading and option moneyness and later use them to understand how to read option chain data completely at one go taking different example of stocks and index.
Call and Put Options Examples:
Before we begin to dig deeper about option chain data and analyzing the same, let us first know basic of call and put options trading and about Moneyness of an option contract.
There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options. A call option gives the holder the right to buy the underlying asset for a certain price by a certain date. Whereas a put option gives the holder the right to sell the underlying asset by a certain date for a certain price.
Basic of Call Option:
“The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (underlying) from the seller of the option at a certain time (expiration date) for a certain price (strike price).
The seller (or writer) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (known as premium) for this right”.
Basic of Put Option:
On the other hand, Put Option is a contract that gives you the right but not the obligation to sell the underlying at a specified price and within the expiration date of the Option. Here again, the contract gives you the right but it is not mandatory for you to sell the underlying.
In other words If you’re buying a call option, it means you want the stock (or other security) to go up in price so that you can make a profit from your contract by exercising your right to buy those stocks (so that you can sell them to cash in on the profit).
Opposite to this is put option perspective, he wants the price to decline to benefit. when you buy options you can either hold the option till expiry and let the exchange do the settlement for you this is called Exercising a contract or you can close the position before expiry and book profits/loss.
So overall there are four possible positions in option markets:
- A long position in a call
- A short position in a call
- A long position in a put
- A short position in a put
Taking a short position in an option is also known as writing it.
Moneyness of an option contract:
Moneyness in options can be defined as the association between the strike price of an options contract and the price of the underlying security. The underlying price is the price at which the underlying asset trades in the spot market. This is current market price at which stock is trading in spot market.
There are three main classification that are used to describe the moneyness of an options contract.
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.
Out of 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.
Other than above mentioned classification two more are included which is known as ‘deep in the money’ and deep out of the money’.
You might be thinking What is the purpose to know all this terms. As a matter of fact Even if you are just using very simple strategies like taking a single position, you still need to consider moneyness. Understand this every options trading strategy requires knowing what moneyness state the options you are buying or selling (writing).
For example, if you are buying contracts on an underlying security that you expect to move substantially in price in a short time frame, then buying out of the money contracts would increase chances of your profits.
On the contrary If you are expecting a smaller movement, then in the money contracts would probably works as a better & less risky .
In case you start using more complex strategies, moneyness becomes even more important. Another example, May be a strategy might involve buying in the money contracts and then writing out of the money contracts on the same underlying security. Read more about option moneyness here.
Let us now focus our attention back to option chain data and how to analyse it.
How to Read Options Chain Data?
With attention to above points, now we will learn how we can analyse option chain and use it in our trading. However it’s important to understand basics of the main components in option chain as discussed above.
As a matter of fact learning them does not require to be technical in any sense so you need to keep them in mind while doing the option chain analysis.
As an illustration let us choose Nifty Option chain and analyse the data. In case you do not know what is Nifty? click here. The Option chain data of the Nifty is specifically useful considering that it is one of the most liquid contracts and weekly options are also available on the same.
- Nifty is an combination of top 50 stocks, hence we term it as Index. Nifty is Index of highly active stocks on NSE. In F&O segment, Nifty Futures and Options are most liquid. To find the nifty 50 option chain, we need to select the equity derivative option in orange box. Once selected in the search box type nifty and click on it. Click on option chain mentioned on top right on next page.
- In the image below pay attention to boxes in different colors. In red box all major data such as volume, OI, IV, LTP, change in OI etc. is given. Black box includes all the strike. In orange box calls and green is for puts,
- In the image above, orange box reflects all call option data. Whereas at right side Put Option. On both sides of the strike prices, we have variety of data like OI (open interest), Change in OI, Volume, IV(Implied Volatility), LTP, Net Chng, Bid Qty, Bid Price, Ask Price and Ask Qty. Have you observed the data is given in different colours. Why some of the strike of call & put option is in light pink and rest in white?
The data in pink part of call option is In the Money (ITM) while those in the white are Out of the Money (OTM). Where as data in pink for put options is in the money and white out of the money.
So for Call Options, strike prices lower than the current price of the underlying are highlighted at the time of writing this Nifty was at 12,968. So below that are all ITM for call option and above is OTM.
While for Put Options strike prices greater than the current price of the underlying are highlighted therefore below 12968, all are OTM put option strike prices and above 12,968 ITM.
Remember with change in underlying value of nifty the color also changes with respect to different strike prices for both call and put. Some ITM strike will become OTM and vice-versa.
Now that you know where and how to open and read the option chain table keeping the vital information of volume, IV, OI etc.
Let us try to interpret this data as if you are going to trade live in market by choosing the strike price. Let us first take an example of another important index BankNifty.
How To Read Nifty/BankNifty Options Chain?
The reason we understood OI, volume, IV and moneyness above as this will be helpful while analysing the option chain data for stocks options as well as Index. Change in any of this points for any strike price will guide you while thinking of making an entry and exit.
Moreover it will be quite helpful to measure the support and resistance level for a particular stock or index in option chain table.
Let us take an example of Bank Nifty first, checkout the image below and highlighted strike price for reference. Underlying Index: BANKNIFTY 29609.05 As on Nov 27, 2020
What do you observe by looking at the option chain data above, keep in mind i have chosen the table with nearby strike prices as most of the trading (buy/sell) happens here. In other words ATM strike prices tend to have more volume, OI as well as Implied volatility.
As clearly visible Open interest, volume both at higher side for highlighted black box strike prices, which simply means most of the option contract are sold and bought at these levels.
Another point which i want to include is Option buying does not require much amount and it is done by most of the normal retail traders, whereas writing or shorting the options require higher margin hence it is usually done by big institutional traders, fund house or professional traders.
Note: How to find call writing in option chain?
Many beginners do not understand whether it is a stock/index option chain table, OI is the total of all the buys or all of the sells, not both. To know OI in any option chain, you should know total of either buyer or seller not sum (addition) of both.
Hence while reading one has to look OI data from the sellers perspective. So call writing in option chain is same as OI data or change in OI for both calls/puts of option contract.
Therefore, whenever you take position always have a thought about the option writer, as in most cases they have right directional view of the options contract.
So first thing is while making any entry or creating a position the strike price that you select must have good volume and OI as it represent the interest and ample liquidity.
Another thing to notice in above bank nifty option chain data is most of the high OI and volume are at those strike which are even number rather than odd for e.g. 29000, 29500, 30000, 30,500 etc. so this are the levels of major resistance and support.
If this levels are broke up/down than you need to rethink your strategy, moreover you can see for call option maximum call writing is done at 30,000 , 30,500, which means many smart professional have shorted at this levels.
Likewise for puts maximum put option writing is done at 29000, 28,500 which establish the fact that out of the money OTM strikes have higher OI.
Therefore always remember for calls OTM strikes (those strikes which are above underlying value, niftybank was trading at 29608) will acts as a resistance and OTM puts (those strike which are below underlying value) will acts as s support area.
Hence in above option chain table 28500 to 30,500 is the strongest support and resistance levels for a series (expiry).
Now suppose if any of this level are breached what happens subsequently? For example, if the BankNifty or for that case any underlying asset start falling down from current levels than put writers (you write puts because you want the underlying to go high) will start unwinding their current position as the value of the premium will reduce which will lead to call writing at higher or around those levels strikes.
This will make the bearishness more effective and it may lead to fall to another support area.
Similarly, if the underlying goes high such as above 30,000 levels, call writers (you do call writing when you are bearish about the underlying) will start unwinding their positions , if followed by put writing this can make the underlying to breach another level of resistance i.e., 30,5000.
Now that you know about the significance of support and resistance levels in option chain and what happens at those levels, let us understand in brief about how to gauge the overall trend of an underlying such as nifty, BankNifty or stocks for that matter.
Finding Correct Trend Of Underlying Using Option Chain Table:
While reading the option chain data we understood the impact of OI, volume, IV as well as the areas of support and resistance levels. Now one need to know that SR levels changes with change in underlying value, therefore until you measure and understand the overall direction or trend of the underlying picking up the correct strikes are less likely.
- Remember if both call/put writers are decreasing their position in lower strike prices and increasing the position at higher strike prices, this reflects SR levels are shifting up/higher which means the overall strength is increasing and the underlying trends is going up. This is a bullish signal.
- Whereas if both call/put option writers are decreasing their positions at higher strike prices and increasing at lower strike prices, this reflect SR levels are shifting towards lower end which means the overall strength is weaken and the underlying trends is going down. This is a bearish signal.
- On the other hand if support is shifting towards higher levels and resistance towards lower levels, or vice versa shows the indecision about the trend of the underlying.
How do you trade with the option chain?
Let us bring back the OI and price table again and combine them both with SR levels and OI, this will help us to understand the shifts in overall trend of the underlying.
Open Interest (OI)
If stock price increasing with high OI more trades will build on long side
Longs build up started unwinding or covering their position from market
Due to short build up stock price decreasing
As price increasing shorts covering their position from market
Let us take an example of Nifty 50 option chain data and go through an example to better understand. Underlying Index: NIFTY 12968.95 As on Nov 27, 2020
Look at the above nifty 50 option chain table the box highlighted in black shows the net change in premium value and in red is change in the open interest (OI).
Before we further discuss that take a look at the below image telling you about the impact of new/fresh long and short position built as well as exiting the long and short position.
Keeping the above option chain table of nifty 50 (underlying value at 12968) and image in mind let us discuss about what exactly happening here.
From left OTM strikes (calls) in red and black box shows the increase in option interest with decrease in call premium, this indicates that new fresh short position(writing) is being built in call options.
This simply means that call writers for OTM strikes are expecting the price of the underlying which is currently at 12968 will not going to higher levels.
The important levels to watch out for is 13100, 13200, 13300 as maximum OI changes are happening here.
Now, look at the top left ITM strikes for call option in red and black box, here the OI has decreased with decrease in premium as well. This indicates liquidations of longs that have been built in expectation of underlying value going higher is either covering losses or booking profit.
They are observing that nifty may move down instead of going higher levels.
Let us see from bottom right ITM strikes of puts, here the premium have increased but the OI have decreased which suggest that those who have created short positions here at this strikes are covering their shorts either to book profit or cover losses.
At the end from left top OTM strikes of puts, here the premium have increased with increase in OI levels, this indicates at this strike people have bought or going long as they are expecting the underlying to go further down.
Points to remember here for short term trading perspective:
- OTM call writing and OTM put buying suggest a bearish trend for underlying asset.
- If shorts unwinding (put writers covering shorts) is happening at ITM put options strikes, it indicates bullish positions are getting closed expecting underlying value will not increase.
Similarly for even stock option contract which are liquid enough to trade i.e. with high OI and volume such as Reliance Industries, SBI, TATA Steel, ICICI Bank, Asian Paints etc. You may use above observation while reading the option chain data.
A point of caution is not to wholly rely only on option chain analysis, remember that intraday trading or for that matter trading in derivatives is quite risky therefore never believe in any one method. Always use technical indicators such as MACD, Bollinger bands, RSI, check Candlestick Chart Patterns keep an eye on Moving averages and make sure you should always have a rationale behind your trade.
I hope you now have a thorough understanding of how to read option chain data and do better analysis of the table. Fundamentalist and technical analysts also use the option chain data as an important data point as an authority for their view.
Even for chartists, option chain data trends can be an additional evidence to be considered. Once you understand the option chain, choosing the best strike price becomes easy.
Apart from this, there is another very important term which should be used with and known to an option trader termed as Option Greeks. The Option Greeks represent the unanimity of the stock market.
It help us to know how the option will behave to changes in certain variables attached with the pricing of an option contract. Greeks is a term used in the options trading to represent the different dimensions of risk involved if you take any position in option trading.
You can go in depth in to option greeks and delta here and learn how option chain with delta helps you in many ways.
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