Option Chain

Most retail investors count option chains among the most natural ways to represent information. It’s easy to follow sequence simplifies the entire process of gathering information about specific options for particular underlying securities. To make the most of the data presented in an option chain, one must become familiar with its terminologies and role in general. 

What is Option Chain?

It can be described as the listing of all option contracts. It includes both puts and calls for a specific security.  It is also known as an Option Matrix and is considered useful for trading on the following day. 

With the help of Option Matrix, skilled users can decipher the direction of price movements. It also helps to identify the points at which a high or low level of liquidity appears. Typically, it permits traders to evaluate the depth and liquidity of specific strikes. It captures these following metrics successfully –

• Executed price
• Real-time bid price
• Ask price
• Ask quantity 
• Bid quantity

Collectively, they extend a fair idea about the overall depth and liquidity of specific strikes. 

Components of Options Chain Chart

In general, there are 4 columns, namely – net change, bid, ask and the last price. They represent vital information. Such information helps traders to assess prevailing market sentiment. 

Take a close look at these points below for understanding option chain better – 

• Option type

Typically, options are of 2 types, namely – Call and Put. Call Option is essentially a contract that extends the right to buy an underlying asset at a particular price within a given date. However, it is not mandatory to carry it out. On the other hand, the Put Option is also a contract that extends the right to sell an underlying asset at a particular price within a specific date. Regardless, it is not mandatory to do so. 

• Strike price

Fundamentally, it is a price at which both buyers and sellers of an option agree to carry out a contract. Notably, options trade turns out to be profitable when its price exceeds the strike price.

• In-The-Money or ITM

The call option is In-The-Money if the current market price of an underlying asset is more than its strike price. Conversely, the put option is In-The-Money if its current market price is less than its strike price. 

• At-The-Money or ATM

It indicates a situation wherein the strike price of a call or put option is equivalent to the prevailing market price of an underlying asset.

• Over-The-Money or OTM

When the strike price is more than the current market price of an underlying asset, the call option is said to be OTM. Similarly, when the strike price is lower than the current market price of an underlying asset, the put option is said to be at OTM.

This table below discusses those components which are found on both sides of strike prices –

Significance of NSE Option Chain 

Here are some benefits of referring to Nifty Option Chain –

• Offers a glance at the in-the-money (ITM) and out-the-money (OTM) options. 
• It proves useful for assessing the depth and liquidity of specific strikes.
• It aids traders to find option premium against its corresponding maturity date and strike price. 
• Option chain serves as a warning against breakouts or sharp moves in the index. 
• Unlike, stock option chain, index option chain provides macro-level indications. Regardless, the former serves as a potent stock-level indicator. 
• It provides a better view of the economic Straddles and Strangulations at various strike prices. Thus, enabling them to align investments as per market sentiments. 

Thus, it can be said that option chain serves as a useful tool for both option traders and cash market traders.

Uses of Option Chain

• It can act as a warning system of sharp or abrupt moves in the index.
• It can be used in creating an option strategy at several strike prices.
• It can be used to analyse and draw noteworthy insights about the stock and its probable movements.
• It helps the traders in evaluating the liquidity and the depth of the option contract.
• It offers a snapshot of significant statistics about a stock option in a single window.