What is option chain and how to analyze it?


Posted by: Invos Research
Published on: January 12, 2023
What is option chain and how to analyze it?

An option chain is a listing of all the options contracts that are available for a particular underlying asset, such as a stock. It typically includes information on the strike price, expiration date, and the current bid and ask prices for both call and put options.

To analyze an option chain, there are several key factors to consider:

  1. Strike Price: is the actual price at which the underlying asset can be bought or sold if the option is exercised. It's important to choose a strike price that is in line with your investment thesis for the underlying asset.
  2. Expiration Date: is day on which the option contract expires and can no longer be exercised. It's important to choose an expiration date that gives you enough time for your investment thesis to play out, but not so much time that the option becomes too expensive.
  3. Implied Volatility: measures the expected volatility of the underlying asset's price. The higher the implied volatility(IndiaVix), the more expensive an option becomes on a day. Understanding the implied volatility and making sure it is in line with the current market conditions will help you make more informed decisions on whether to enter or exit a trade.
  4. Bid-Ask Spread: The bid-ask spread is the difference of highest price a buyer is willing to pay for an option (the bid) and the lowest price at which an option seller is willing to accept (the ask). A narrower bid-ask spread generally indicates more liquidity in the market for that option.
  5. Open Interest: is total number of outstanding option contracts that have been bought but not yet sold or exercised. A high open interest generally indicates a high level of interest in that particular option.
  6. Delta: Delta is a measure of how much the price of an option will change based on a $1 move in the price of the underlying asset. It is a measure how sensitive an option is to changes in the underlying asset's price.

An option chain can be viewd on National Stock Exchange of India (NSE) website. First, search for the stock in question and then selecting the "Option Chain" tab. The option chain will display the available options contracts for that stock including the strike price, expiration date, and the current bid and ask prices for both call and put options. You can also find the open interest, IV and other greeks as well. Additionally, there are various financial websites and trading platforms that also provide option chain information for stocks traded on the NSE.

By analyzing these factors, you can better understand the market for a particular option and make more informed decisions on whether to enter or exit a trade. Additionally, by comparing different options within the option chain, you can evaluate the relative value of different options and make decisions about which options to trade.