How To Read Option Chain Data
Friends, today’s article is going to be especially valuable for those options traders who have just started trading options. Options trading is profitable, but to make a profit, you have to become capable first. First of all, you have to learn the skill of how options trading is done. I do not say that I know everything, but based on my experience, I can share with you as much information about options trading as I know.
Many factors work in options trading, like reading the option chain of stock/index, Greeks, open interest, change in open interest, iv (implied volatility), and options premium (cheap or expensive). We will discuss all these factors one by one, but in today’s article, I will explain how to read the option chain data in options trading. If you know how to read an options chain, then your profit is sure to be made.
What is option chain data?
Option chain data is commonly used to analyze open interest data in futures and options trading. Option chain data has 2 sides; the call side is on the left and the put side is on the right. Open interest data is available on both call side and put side.
Option chain data includes not only open interest but also change of open interest (coi), volume, last traded price, IV (implied volatility), strike price. We will learn about all these factors one by one in this article
Components of Option Chain Data
1. Open Interest
2. Change of Open Interest
3. Strike Price
4. Volume
5. IV (Implied Votality)
6. Last Traded Price (option premium)
WHAT IS STRIKE PRICE IN OPTION CHAIN DATA
First of all, let us talk about strike price, what is strike price in stock or index? You must have seen in the option chain data of index that nifty range is given in the middle like 24500, 24550, 24600, 24650.
The strike price of nifty is kept at a difference of 50 points. You get a lot of options from the strike price that you can take your position in any strike price options.
If you feel that the future movement of nifty is going to be bullish then you can buy Call on any strike of nifty and if you feel that the future movement of nifty is bearish then you can take Put on any strike.
I am saying “any strike” here just for understanding, which strike price to take is a matter of analysis.
Similarly, there is strike price in the option chain data of stocks also. The difference in strike price depends on the price of different stocks.
If the price of a stock is Rs 1000, then the difference in strike price would be around Rs 20, if the price of a stock is Rs 500, then the difference in strike price would be around Rs 10, if the price of a stock is around Rs 5000, then the difference in strike price would be around Rs 100.
I hope you have understood the concept of strike price. If you have any questions, you can ask in the comment box.
what is open interest in option chain data
You have learned the main components of option chain data. Now a question must have come to your mind that what is this open interest?
Open interest means how many positions of traders are still open on both sides i.e. call side and put side
Suppose you bought a Nifty call of 24500 at a premium of Rs 100. So, your 1 open interest got added to the call side of 24500. Similarly, when millions of traders create their positions on different strike prices, whether it is on the call side or the put side, the open interest of that strike price keeps increasing.
In the above image, I have marked oi (open interest). This is the data of open interest on the call side. As you can see in the image, at the strike price of 24250, 18450 traders are currently holding their positions on the call side.
This means that these traders have still not closed their positions. 96850 traders at 24300, 66400 at the strike price of 24350. The maximum buildup of open interest always happens around ATM (at the money).
As you can see in the image, the highest open interest is 24,133,700 at the strike price of 24750. Because the price of Nifty 50 is currently running at 24730 while I am writing this article.
One thing you should always keep in mind is that the open interest of lakhs that is created in the option chain data is not created by any retail trader. Retail traders work in 1 or 2 lots only. This open interest of lakhs is always created by big institutional players, proprietary desk players, FIIs. And big players always sell options, they never buy. Options selling always requires more capital.
To sell 1 lot of Nifty 50 option, a margin of more than 2 lakhs is required, and retail traders do not have that much capital. Selling lakhs of lots with such an amount is only possible for big players.
So, whenever you read the option chain data, keep in mind that whatever open interest is there on call side or put side at all the strike prices, those options are sold and not bought.
You must have heard that the market has gained momentum due to short covering. I will tell you about what short covering is and why the market gains momentum due to short covering in this article. Now let’s go step by step.
what is CHANGE IN open interest in option chain data
Change in open interest means how much the traders have increased or decreased the open interest in their previously created positions. The market conditions change every day, sometimes the market is bullish and sometimes it is bearish. Traders also keep increasing or decreasing their positions accordingly.
I told you about short covering above, now I will tell you what short covering is and with this you will also understand the concept of change in open interest.
When the market is bullish, traders sell put options and the open interest on the put side starts increasing daily. For example, if the price of Nifty 50 is 24750 and the market is bullish, then traders will start selling puts of 24700, 24650, 24600 strikes because the theta of ATM strike options falls quickly.
But if the market suddenly starts declining due to any reason, the price of put will start increasing and the open interest which was increasing during the bull run will now start decreasing on the put side. Now there are 2 things to understand here.
1. When the market was bullish, traders were selling puts, and the premiums of put options were falling. For example, if premium was sold at Rs. 50 then it would be 50, 49, 48, 45, 40…… In this way the prices would start falling and open interest was also increasing.
Earlier open interest was 1,00,000 and now it has increased to 1,50,000 but now as the market trend has changed from bullish to bearish, the premiums of put options would start increasing.
For example, 50, 51, 52, 53, 54, 55…. and open interest would also start falling because the market is going against put sellers and the open interest which had become 1,50,000 will now start decreasing because traders are reducing their positions.
2. Firstly, the price which instead of decreasing started increasing this is called short covering because the traders are getting out of the sold put and are buying, if they do not buy then the put price may increase from 51 to 151 also, therefore the position will have to be closed as soon as possible.
So, the price which should have been 50 to 47, 46, after selling the put, now the price of the same put is going up to 51, 52, 53 because firstly the market situation has changed and secondly the traders are getting out of their positions.
Open interest also decreased. Earlier, the open interest which had increased from 1,00,000 to 1,50,000 means the change in open interest was 50,000. Then later when the market started falling and traders started cutting their positions, the open interest decreased from 1,50,000 to 1,00,000 and later if the market falls further, the open interest may fall further, and the premium of put options may increase further.
This was about short covering and change in open interest in put options. If the reverse of this is done, then when there is a fall in the market, the options traders sell the call side options, but if the market situation changes from bearish to bullish, then the premium of the call side will start increasing instead of decreasing and the traders selling the call options will have to cut their positions in any case.
In this situation, short covering starts happening in call options and the open interest on the call side starts changing
I hope you have understood the concept of change in open interest and short covering. If you have any question, you can ask in the comment box.
We now move towards the next component of option chain data, option premium. In option trading, you can earn money in two ways; one is by buying options and the other is by selling option premium. Most of the big traders sell the option premium and keep it.
Retail traders mostly buy option premium because buying requires less capital and selling options requires more capital. In the above image, I have marked “LTP” and this is called option premium.
I will bring a separate detailed article on whether option premium is cheap or expensive because this is a complete method of knowing whether the option premium that we are selling or buying is cheap or expensive.
Suppose the premium of call option of Nifty 24700 is currently running at Rs 50, you have bought this call option, then this call option will be profitable only when Nifty goes above 24750 like if Nifty goes above 24850 on the day of expiry, then the price of this call option will be Rs 150, your profit will be Rs 100 and you had already paid Rs 50 at the time of purchase.
At the time of selling, when the premium goes from 50 to 0, then the entire amount will be credited to your account. 1 lot of Nifty consists of 75 shares, so 50*75 = Rs 3750 will be your profit.
what is volume in option chain data
We now move towards the next component of option chain data, volume. When you read option chain data, you must look at the volume. If the volume has increased more than required in any option, whether it is the call side or the put side, then assume that the market is going to move in that direction.
I am saying this but there is no guarantee that this will happen. First do your analysis and then take a trade. I am telling you all this so that you understand that before taking any trades, contact your financial advisor and make your analysis strong.
what is IV in option chain data
IV (Implied Votality) plays a very important role in options trading. IV shows whether the market is fluctuating or not. When IV is between 10-12, the market fluctuation is very less but when IV reaches 18-20, the ups and downs in the market increase.
When IV is low, options should be bought and when IV is high, options should be sold because at high IV the prices of options premium increase.
At low IV, options should not be sold because if the votality increases in the market, the prices of options premium start increasing due to which options sellers start incurring losses.
what is PCR RATIO in option chain data
In options trading, you must have heard a term called PCR which means put-call ratio. PCR means whether put options are sold more or call options.
If PCR is 0.50-0.60 then it means that call options have been sold with a lot of pressure and if PCR is around 1.50 then it means that put options have been sold in large quantities. When call options are sold in large quantities then it means that the market sentiment is negative and if put options are sold more then the sentiment is positive.
Many traders take trades keeping in mind the PCR ratio. When PCR is around 0.50-0.60 then the market is considered oversold and when PCR is around 1.50 then the market is considered overbought.
CONCLUSION
If you want to be successful in option trading, you should know how to read option chain data. On which side (call & put) is the open interest increasing or decreasing.
How much change is happening in the open interest, whether short build up is happening or short covering is happening, all this is known from the option chain data.
Small traders can also participate fully in option trading, so if you learn to read the option chain, then a good income can be made every month from options trading.
I hope that this article of mine will help you in reading option chain data, if you have any suggestion or want to ask something, then you can ask me in the comment box. I will bring more articles related to options trading.
FAQ about option chain data analysis
What is option chain data?
Option chain data is used in options trading to analyze open interest, change of open interest, IV (implied volatility) option premium. Whether it is stock or index, it is very important to analyze option chain data for option trading.
What is open interest?
Open interest is the position created by traders which remains outstanding until it is cut. Open interest means that traders have interest in their position according to their view, whether bullish or bearish.
What is change in open interest?
Change in open interest means when traders decrease or increase their open interest. Market conditions change every day, and traders also make changes in their existing positions accordingly.
If the view of the traders is bullish and they have sold puts and suddenly the market becomes bearish then the traders have to reduce their bullish positions.
Similarly, if the traders have adopted a bearish stance and the market suddenly becomes bullish then the traders have to cut their bearish positions.
What is IV (Implied Votality)?
IV tells whether options should be bought or sold now. If IV is high then options should be sold and if IV is low then options should be bought. When IV is between 10=12 then IV is LOW and when IV is 18-20 then it is considered high.
What is PCR ratio?
PCR ratio is also known as Put Call Ratio. PCR ratio tells whether the market is oversold or overbought. When PCR is 0.
When the PCR ratio is around 60, the market is considered oversold and when the PCR ratio is around 1.50, the market is considered overbought.
The PCR ratio is obtained when the total open interest of the put options is divided by the total open interest of the call side.
What is options premium?
To trade in Nifty 50, you either have to buy Nifty FUTURES, which requires more capital and small traders are not able to participate in the market, so options trading was introduced, which requires less capital.
If you want to buy Nifty 50 and the price of Nifty 50 is currently running at 24800, then you can buy a call option of 24750 of Nifty 50.
The market decides how much its premium will be. Whatever the current price at that time, you will have to pay that much premium for the call option of Nifty 24750.
1 lot of Nifty consists of 75 shares and suppose the premium is currently running at Rs 50, then you will have to pay 75*50 = Rs 3750 for 1 lot.