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What is Option Chain?

An Options Chain is a comprehensive listing of all available options contracts for a particular underlying asset, organised by their strike prices and expiration dates. The chain consists of two primary sections: call and put. The option chain helps traders observe the open interest for a particular option and accordingly, work on their F&O trading strategies.

How to read an option chain?

The option chain displays call options on one side and put options on the other, with strike prices and expiration dates listed in the drop-down. A call option would give a trader the right to buy an underlying asset at the specified strike price and a put option, the right to sell the underlying asset at the specified strike price. 

Key data points include

Strike Price: The price you can buy/sell the underlying asset if you exercise the option.

Expiry Date: The date by which you must exercise the option, otherwise it expires.

Premium: The cost of buying the option contract.

Open Interest: The number of existing open contracts for that specific option.

How to leverage the option chain in a trading strategy?

Analysing an option chain involves several key steps. First, focus on the strike prices that align with your trading strategy. Based on the current price of the underlying asset, the option could be any of the three kinds.

A call option with a strike price lower than the market price is called an “in-the-money” call option while a put option with a strike price higher than the market price is an “in-the-money” put option. Similarly, an “out-of-the-money” call option is where the strike price is higher than the market price and an “out-of-the-money” put option is where the strike price is lower than the market price.

Here is a table to understand call and put options better.

CallPut
In the moneyMarket price > strike priceMarket price < strike price
Out of the moneyMarket price < strike priceMarket price > strike price
At the moneyMarket price = strike priceMarket price = strike price

Pay attention to each option contract's open interest and volume. Look for patterns in the data that could signal market sentiment shifts. Understanding how to read option chain data is crucial for making informed decisions in options trading. Utilising investment apps can streamline the process, providing real-time updates and user-friendly interfaces for efficient options chain analysis.

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