School of Stocks Reading Option Chain using Volume & OI

Options trading is particularly popular with traders who regularly trade the commodity futures markets. John Hull’s «Fundamentals of Futures and Options Markets,» which is considered a companion text to his book “Options, Futures and Other Derivatives,” offers a clear understanding of the futures and options trading markets. Widely recognized as an authority on derivatives, futures and risk management, Hull has served as a consultant to many of the best-known investment banking firms.

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Trading Psychology

Conversely, the higher the probability a contract could be profitable, the higher the premium. The Company reserves the right to delete, modify, change or discontinue any or all of the information on this website without giving notice to any user, individual, group of individuals, institutions and any such governing bodies. If you have any concern about privacy at our Product, please contact us with a thorough description, and we will try to resolve it. Our business changes constantly, and our Privacy Policy and the Terms of Use will also change; but you should check our web site frequently to see recent changes. Unless stated otherwise, our current Privacy Policy applies to all information that we have about you and your account.

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  • Let us take the example of Apple Inc. stock to offer a snapshot of how the option chain looks for a real-life entity.
  • Open interest is important because investors want to see liquidity, meaning there’s enough demand for that option so that they can easily enter and exit a position.
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Fresh Put writing between strikes 4500 and 4800 suggests that this region could act as strong support zone going forward. Having said that, short unwinding of Calls between 4500 and 4800 suggests that the underlying could break above the upper end of this range. Here, the open interest has mostly decreased and so have the Call premiums.

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With options, the market price must cross over the strike price to be executable. For example, if a stock is currently trading at $30.00 per share and you buy a call option for $45, the option is not worth anything until the market price crosses above $45. Volatility refers to the dynamic changes in price that a security/derivatives contract undergoes when trading activity continueson the Stock Exchanges. Generally, higher the volatility of a security/derivatives contract, greater is its price swings. Theremay be normally greater volatility in thinly traded securities / derivatives contracts than in active securities /derivativescontracts.

What is Option Chain?

Hence, it is usually done by professional traders and large market participants such as FIIs and funds. On the other hand, option buying is usually done by small market participants, such as retail traders. Hence, when lookingat theOption Chain, think from the writer’s perspective and not from the holder’s https://1investing.in/ perspective. In fact, this is another reason why it is important to track the Option Chain. As most of the option writing is done by professionals and large market participants, changing Option Chain structure can often give vital clues about the impending move in the price of the underlying.

It is equally important to understand each of these concepts, as they are extremely useful, especially when trading options. Besides using Option Chain to identify areas of support and resistance, it can also be used to find out the implications of shifts in support and resistance,as and when they occur. The direction in which support and resistance are moving tells a lot about the overall direction of the underlying instrument. To do this, one must monitor the changes in OI tab for both Calls and Puts. Keep in mind that the entire Option Chain must be monitored and not just the options that are OTM.

I use this word because any noteworthy gap up or gap down on the following session can change the Option Chain landscape. Continuing with our discussion, when looking at an option chain, such as the one shown in the image above, look at where most of the open interest positioning is. In the above case, we can see that for Calls, maximum option writing is at strikefollowed by and strikes.This means that at these strikes, a lot of professionals have written Call options and as such, these levels become quite crucial. Similarly, for Puts, maximum option writingis at strike followed by and strikes. See that huge open interest is usually built at strikes that are OTM (the Nifty price at the time of writing was 12098). Volume refers to the total number of contracts that are created over the course of the day.

Understanding Option Chain Components

If the prices move against you, you maylose a part of or whole margin amount in a relatively short period of time. In the derivatives market, the amount of margin is small relative to the value of the derivatives contract so the transactionsare ‘leveraged’ or ‘geared’. Derivatives trading, which is conducted with a relatively small amount of margin, provides thepossibility of great profit or loss in comparison with the margin amount.

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It can also be seen that for all the OTM Put strikes with the exception of 1440 and 1460 as well as for all of the ITM Put strikes, the decline in Put premium has been accompanied by a fall in OI. On the Call side, the rise in premiums of ITM Calls accompanied by a corresponding fall in OI indicates at short unwinding by Call writers. Furthermore, there has not been a consistent trend of Call writing at OTM strikes.

On the other hand, if a buyer and a seller are both closing out their existing positions, open interest reduces by 1 contract. Meanwhile, if one party to the trade is establishing a new position while the counterparty to that trade is closing out an existing position, open interest remains unchanged.Just looking at open interest doesn’t give a clear picture. Instead, one must always compare open interest with price to understand the strength of the move. In the table below, we have highlighted the relationship between price and open interest.

A complete list of every option (put and call) that can be traded on a specific underlying asset, such as stocks, currencies, commodities, or indices, is known as an option chain. For various strike prices, it gives information on premium, volume, open interest, etc. In a similar way, the user can also look at the option chain for other index options as well as for various stock options that are traded on the NSE.

AN – OI AND VOLUME

This expanded second edition includes valuable information on option theory, dynamic hedging, volatility, risk analysis, position management, and stock index futures and options, making for a perfect read on both strategy and risk management. Another important thing to keep in mind is that Option Chain analysis should be done only on instruments that are liquid. Performing Option Chain analysis on instruments that are illiquid will often give incorrect information and will be prone for errors.

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