Understanding Option Chains ⛓
The listing of all option contracts is known as the options chain. It is divided into two sections: call and put.
A call option is a contract that allows you the right, but not the responsibility, to buy an underlying asset at a specific price and before the option expires.
A put option, on the other hand, is a contract that provides you the right but not the responsibility to sell an underlying asset at a specific price and before the option expires.
The stock price at which the investor is willing to acquire the stock if the option is exercised is referred to as the option strike.
An option chain is a list of all option contracts for a certain security, including put and call options.
Users can also utilise Option Chain to examine and identify the points where there is a low or high amount of liquidity. It usually restricts traders' ability to assess the depth and liquidity of individual strikes.
We also have statistics such as OI, change in OI, Volume, IV, LTP, Net Change, Bid Qty, Bid Price, Ask Price, and Ask Qty on both sides of the strike prices. Let's have a look at what each one means:
• OI: Open Interest is abbreviated as OI. It is a piece of information that indicates traders' interest in a specific strike price of an Option. The quantity of contracts traded but not exercised or squared off is represented by OI. The greater the number, the more traders are interested in a specific strike price of an Option. As a result, there is enough of liquidity for you to trade your Option whenever you choose.
• Change in Open Interest: It informs you of any changes in the Open Interest during the expiration time. The total number of contracts closed, exercised, or squared off. An increase in OI that is large should be closely watched.
• Another measure of traders' interest in a specific strike price of an Option is volume. It informs us about the total number of Option contracts traded in the market for a specific strike price. On a daily basis, it is calculated. Volume might assist you figure out what traders are interested in right now.
• IV: Implied Volatility is abbreviated as IV. It tells us what the market thinks about the underlying's price movement. A high IV indicates the possibility of large price movements, whereas a low IV indicates no or few changes. IV does not provide information on the price movement's direction, whether upward or downward.
• The acronym LTP stands for Last Traded Price of an Option.
• The net change in the LTP is referred to as the net change. Positive changes, such as price increases, are shown in green, while negative changes, such as price decreases, are shown in red.
• The amount of buy orders for a specific strike price is known as the bid quantity. This informs you of the current demand for an Option's strike price.
• The price mentioned in the most recent buy order is known as the bid price. As a result, a price that is higher than the LTP may indicate that demand for the Option is increasing, and vice versa.
• The price quoted in the most recent sell order is known as the ask price.
The amount of active sell orders for a specific strike price is known as the ask quantity. It informs you about the Option's supply.
Let's look at why one area of the date is highlighted in a different colour than the rest. To comprehend it, we must first comprehend ITM, ATM, and OTM.
• In-The-Money (ITM): A call option is in the money if its strike price is less than the underlying asset's current market price. If the strike price of a put option is higher than the current market price of the underlying asset, it is in the money.
• When the strike price of a Call or Put option is equal to the current market price of the underlying asset, it is said to be at-the-money (ATM).
• A call option is Over-The-Money (OTM) if the strike price is higher than the current market price of the underlying asset. If the strike price of a put option is less than the current market price of the underlying asset, the option is out of the money.