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How to perform Option Chain Analysis in Options Trading?

Option chain analysis is very popular among stock traders because it provides data that can reveal market expectations be it support and resistance, directional bias, and expected volatility. And these are all very useful inputs to form trading strategies but one should know how to keep it simple because we have hundreds of contracts getting traded in NSE and it is very difficult to review each and every contract. If you attempt to do so you will end up wasting time. If you are a beginner in options trading, then this blog is exclusive for you.

Option Chain Data Analysis

Option chain analysis or Option chain data analysis means reading and interpreting (studying) the option chain. It is very important for you to understand how to read an option chain . Option chain gives you all the data you want while you are trading in options. Many traders lose money in options trading because they don't know exactly how to analyze or understand the option chain. An option chain is a very useful tool for options traders and cash market traders. To learn option chain analysis let us first understand what is option chain?

What is option chain?

An options chain is a listing of all available options contracts for given security. It is also known as an options matrix. It shows strike prices, all listed puts, calls, their expiration, volume, and pricing information for a single primary asset within a given maturity period. An options chain provides detailed information about quote and price and it is different from options series or cycle, which indicates the available strike prices or expiration dates. Following is the window of option chain on the NSE website.

Let's understand each section in the NSE option chain:

  • The option chain is categorized by expiration date and segmented by calls versus puts.

  • In the Option chain frame, the strike price is at the center[indicated by green box ].

  • The calls are on the left side of the option chain[Indicated by yellow box].

  • The puts are on the right side of the option chain[Indicated by orange box].

  • The green arrow column on both sides of the NSE option chain [indicated by pink boxes on both sides] shows that the share/stock is trading at a higher price compared to the previous day.

How to read option chain data?

Reading option chain, understanding the data and making use of this to decide the best option trading strategies is called option chain data analysis. In order to analyze the option chain data, you need to find the option chain list First.

Following are the instructions to find the option chain list:

  • Open the web browser on your computer and type Option chain NSE and click on the search symbol.

  • Then as shown in the image below click on the official page of NSE(as highlighted by the green box pointed by the red arrow in the image below). NSE stands for National Stock Exchange.

  • After clicking on option chain NSE India, the window of option chain will appear as shown in the image below:

Here you will see there are various options to choose from. Every option Is highlighted by the color box for easy understanding. Now let’s understand each option:

  • The drop-down menu highlighted by the pink box: By clicking on this you can choose to display the option contracts from one of these: 1. NIFTY, 2. FINNIFTY, 3. BANKNIFTY

  • The drop-down menu highlighted by the red box: From this drop-down menu you can select to display option chain for one among various symbols’s stock. For a better understanding of this point refer to the following image:

  • The drop-down menu highlighted by the yellow box: From this drop-down menu you can select to display the stocks of a particular expiration date.

  • The drop-down menu highlighted by the green box: From this drop-down menu you can select to display options for a particular strike price.

  • The dark blue bar shows the order of columns in an option chain as follows: strike, symbol, last, change, bid, ask, volume, and open interest. just like the primary stock, each option contract has its own symbol. Options contracts on the same stock with different expiry dates have different options symbols. CALLS, PUTS, OI, CHNG IN OI, IV, LTP, CHNG, BID QTY, BID PRICE, ASK QTY, ASK PRICE, STRIKE PRICE.

Nifty option chain analysis

Nifty stands for National Stock Exchange Fifty and is the equity benchmark index of the National Stock Exchange (NSE). It was introduced by NSE in 1996, and it is also called Nifty 50 and CNX Nifty by many. Nifty 50 includes stocks from the top 50 of nearly 1600 companies actively traded in NSE across 24 sectors.

In order to see the NIFTY option chain click on the drop-down menu indicated by the light-green color box as shown in the image below:

In the following image, the value indicated by the yellow box shows the current value of NIFTY.

The above option chain is related to the NIFTY options of the various strikes. Here is how to simplify this index options chain. The option chain allows the trader to estimate the liquidity and depth of each specific strike. The option chain represents the executed price, captures real-time ask price, bid price, bid quantity, and ask quantity. When you combine these, you get a clear view of depth and liquidity in each strike and also an understanding of the strategy which needs to imply. The Nifty option chain can be used as an advance warning system of sharp moves or breakouts in the index. Large institutions are more active in index options and they account for over 70% of daily trading. The sudden increase in OI of a particular strike or the reduction of OI at a strike can be an indication of focused action in the Nifty. This can be a useful pointer for traders.

Traders can use this option chain to estimate action in deep out of the money calls and puts. Normally, a sudden increase in activity in deep OTM calls and puts is indicative of a breakout in that direction. The large institutions with their large networks and high-end research may have seen trending in the Nifty much before the others. You can get such hints through the option chain. The IVs can be used to substantiate these findings.

See the following image. You must have seen these shadow areas highlighted by the pink-colored box in the option chain on the CALLS and PUTS sides. Let’s understand this:

It gives you a quick and rapid picture of in-the-money and out-of-the-money options. While the strikes shaded in yellow are the ITM options, the unshaded strikes are the OTM options. This rule applies to calls and to puts.

BANKNIFTY Option chain data analysis

Before BANKNIFTY option chain analysis let’s understand what is BANKNIFTY. Bank Nifty represents the 12 most liquid and large capitalized stocks from the banking sector which trade on the National Stock Exchange. It provides investors and market brokers a benchmark that captures the capital market performance of the Indian banking sector. BANKNIFTY Option chain analysis can be performed in a similar way that of NIFTY option chain analysis. Analyze the BANKNIFTY option chain in the way explained above in this article.

FINNIFTY Option chain data analysis

The FINNIFTY is the abbreviation for the Nifty Financial Services Index which tracks the performance of Indian financial services companies including banks, insurance, housing finance, NBFCs, other financial services companies, etc. The index consist of a maximum of 20 stocks and a stock's weight is based on its free-float market capitalization. FINNIFTY is the first index derivative with a weekly future contract along with weekly options.

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