In this section, we are going to learn an extremely useful tool that provides a listing of all available options contracts called ‘Option Chain’.
What is the Option chain?
Option chain is an integral tool to every option trader. It is a matrix where all the option contracts -both call and puts are listed in a chronological order.
Traders use the option chain to understand the dynamics and the direction of price movements. It also helps to identify which options contracts are liquid and which are illiquid. Normally it helps the traders to evaluate the depth and liquidity of specific strikes. An Option chain helps a trader with the following information and data.
- Last Traded price
- Bid price
- Ask price
- Ask quantity
- Bid quantity
- Implied Volatility
- Open Interest
- Change in Open Interest
Let us decode an option chain with an example:
The above image is an option chain of Reliance Industries.
Under the middle column are the strike prices. We must know that these are fixed prices. All the other numbers on the options chain are live and they can change depending on the stock price. It is a price at which both buyers and sellers of an option agreement carry out a contract. From time to time depending on the current market price of the asset, this series of strike prices is decided by the exchange.
When you buy the option you will be purchasing it at the Ask price and when you sell the option you will be selling at the Bid Price. We can see from the image above that both calls and Puts side have the current Bid and Ask price to help traders decide at which price their trade gets executed.
The OI column on the sides of each call and Put is the open interest. It depicts the current number of contracts outstanding with respect to each option contract. The column besides it is the Change in Open Interest column and shows the change from the previous day on a live basis.
The option chain offers a glance at the In-the-money (ITM) and Out of-the-money (OTM) options. The yellow areas highlighted under the Call and Put column are the In the Money options whereas the white areas are the out of the money options. It gives a better view of all the option premiums and the strikes which help them devise their strategy with ease.