In this chapter we will discuss the most simple way of Option Chain Analysis. How could a beginner analyze the data in the NSE option chain and use it. Option Chain Analysis refers to reading the option contracts data that is analyzing the positions of option traders in a particular stock or indices or the underlying asset. We check the options data in the NSE Option Chain, because in Indian future & options are traded in the NSE that is National Stock Exchange.
Option Chain Analysis is an important part of Futures & Options trading and it is also very important for all types of traders whether they are day trader or positional trader. Because Option Chain Analysis gives an overview of total positions of traders in that stock or indices, which indicates the market sentiments regarding that stock or indices and probability of its future price movement. So let’s know the basic concept of Option Chain Analysis and how to read the NSE Option chain.
Table of Contents
- Meaning of Options in stock market
- How to read Option chain
- Opstra Option chain & trading app
- Sensibull Option chain & trading app
- Conclusion
- FAQs related to option chain
Meaning of Options in stock market
Before discussing about Option Chain Analysis lets first take an overview about what is options trading. Options are derivative contracts and it is a part of derivative trading that is also known as Futures & Options trading. These are called derivatives because its prices are derived from the underlying asset, that may be any stock or indices and their price changes in proportionate to the price of the underlying assets. There are some other factors also which affect the price change of the options; those are known as options Greeks. Read more about basics of Futures & Options trading in this article.
Generally option sellers are considered are more intelligent than the buyers because they have to invest more money and take more risk. Mostly big investors those have more fund and institutional investors sell options to hedge their portfolio and save it from the market volatility. So the positions of the sellers reflect their sentiments in any stock or the underlying asset.
Options are traded in lots that are a certain number of shares fixed by the stock exchange. The total price of one lot share could be approximately from 6 lakh to 10 lakh. As Options are contract between the Buyer & Seller of the contract to buy or sell the lot of shares (underlying asset) at a specific price (strike price) on or before a specific date (expiry date). Here the buyer pays a premium that could be approximately from 10 thousand to 15 thousand for one lot and this is the maximum risk for the buyer. But the seller has to pay a margin amount that is approximately 2 lakh to 6 lakh for one lot that depends up on the premium price, market volatility and various other factors. The risk of the seller is unlimited and profit is limited maximum up to the total premium amount. Therefore the sellers have to make proper analysis before making any position that is selling an option contract of any stock or indices.
How to read Option chain
To read or understand the option chain data and analyze it we have to know about the basic concept of few facts mentioned in it. Although there are a lot of figures in the option chain data but most important are the Open Interest (OI), Strike Price and Change in OI. And we have to analyze the MAXPAIN & PCR data. If you want to buy or sell any option contract then you can check its price that is LTP (Last Traded Price). There are two sides of option chain; those are Calls (CE) & Puts (PE). A screenshot of the NSE Option Chain data taken from the NSE India website is given below.
What is CE and PE?
As we know there are two types of option contracts in stock market, those are Call Option (CE) and Put Option (PE). When the option seller assumes that the stock or indices will not go above a particular price within a particular time period then he sell the Call option (CE). So Calls are considered as bearish positions.
In case of Put Option (PE) the seller assumes that the price of the underlying asset will not go below a particular price within a particular time period. So Puts are considered as bullish positions.
Expiry date of option contract
Every option contract has a validity period and the last date is called as the expiry date. There are two types of option contracts for indices like Nifty 50 of Nifty Bank, those are weekly options which expire on every Thursday and monthly options which expire on last Thursday of the month. Stock options have only monthly contracts and the maximum period of an option contract is three months.
What is Strike price?
Strike price is the price of the underlying asset (stock or indices) on which you are betting. For example if you think the Nifty 50 will not go above 17000 on or before 12th May 2022 then you will sell the weekly Call option of Nifty 50 for the date 12th May that is “NIFTY 12TH MAY 17000 CE”. Here 12th May is the expiry date and 1700 is the strike price.
What is IV in Option Chain?
IV in option chain stands for Implied Volatility that is how much volatility in the price of the option is the market expecting in future. It is represented in percentage of price of the option. Volatility simply means the fluctuation or up and down rate of price. So from the implied volatility of the option, traders make projections how high or low the option premium may touch in coming days. (to know more details about IV you can check this article https://www.optionsplaybook.com/options-introduction/what-is-volatility/ )
What is Open Interest in Option chain?
Open Interest is the total number of open positions or contracts at that particular strike price. The increase or decrease in open positions compared to the previous day is known as Change in Open Interest (OI) which indicates whether traders are building new positions or exiting their current positions. It shows how the market sentiments are changing day by day.
What is MAXPAIN in Option chain?
At which strike price the total number of option contracts both call options & put options are maximum is called as the MAXPAIN. This is the point where both the bulls and bears have good number of positions, thus the cumulative or overall market sentiment is likely neutral at this point. Hence it is considered that the price of the stock or indices will expire close to this point on the expiry date.
What is PCR in Option chain?
PCR that is Put Call Ratio is calculated by dividing the total number of put options by the total number of call options or the total Puts Open Interest divided by total Calls Open Interest.
PCR (Put Call Ratio) = Puts OI total / Calls OI total
PCR basically indicates the overall sentiments of the market regarding that particular stock or indices. PCR above 1 show that total numbers of Put Options are more than total numbers of Call Options, hence the sentiments are bullish. And if PCR is below 1 then the Call Options are more than Put Options, so the sentiments are bearish. PCR below 0.5 is considered as oversold and above 1.5 is considered as overbought, and traders expect that market sentiments may reverse from this point.
We can get the option chain data of all the stock and indices, which are traded in the derivative markets, from the official website of NSE India, which provide the data in the simplest form. To check the option chain data on the NSE India website you can search “NSE option chain” on Google or click this link to directly visit the NSE website. We have provided above a screenshot of the NSE Option Chain data taken from the NSE India website.
In case you want option chain data with detailed reports, charts and indicators then you can use other websites and apps like Sensibull and Opstra. We are giving below an overview of these apps and how to read them.
Opstra Option chain & trading app
Opstra is a good app for option chain analysis and implementing option trading strategies. It provides option analytics, option chain analysis, open interest analysis, Volatility skew analysis, results calendar and many more tools for option trading. Although most of its features are for paid pro users but you can check the option chain data with free account, simply login with your Gmail account or create a free account and click on the explore button on Open Interest Analysis section. Here you will get the NSE Option Chain data in shape of graph, which is easy to understand and for quick analysis. You can check here all the important factors like Spot price, PCR & MAXPAIN in the heading and strike price wise open interest in the graph. Below is a screenshot of the option chain open interest graph data taken from Opstra option chain app on mobile.
Sensibull Option chain & trading app
Sensibull is widely used by option traders in India. Many brokers also align its features in their trading app for pro option traders. It provide a lot of features that is required by futures and options traders but most of them are for paid users. You can use some of its features as a free user for which you have to login with your broker’s account or with your Google account. Option chain analysis is also a free feature of Sensibull. Here we have provided some screenshots of option chain data provided by Sensibull app on mobile.
Conclusion
Option chain analysis could be important for all types of traders to analyzing market sentiments according to positions of big players in your selected stocks. That is the basic use of option chain, but FnO traders use option chain analytics in a different perspective as per their requirements, which topics we have not covered here. We have covered here an overview of option chain analysis for basic use of all types of traders. Option trading is high risk-high gain business for which you require good knowledge of technical analysis and experience about the stock market volatility. Therefore most of the expert and experienced traders advice beginners not to directly jump in to F&O derivative trading. In case anyone wants to learn the FnO trading then they must do it after acquiring proper knowledge and under proper guidance of experts.
FAQs related to option chain
What is NSE option chain?
NSE option chain provides the data of call & put options data those are being traded in the National Stock Exchange. It provides all data related to options like open interest that is number of contracts in each strike price, change in open interest, last traded price, IV, bid price, bid quantity, volume etc.
How do I check my options chain?
You can check the options chain from the “NSE Option Chain” data on the NSE official website, or you can check it on apps like Opstra and Sensibull. Some of the brokers also provide option chain data on their trading app both on mobile and web.
Which app is best for option chain analysis?
We prefer Opstra as the best mobile app and website for NSE option chain analysis, because it provide all the important data like Open interest, change in OI, IV, PCR, MAXPAIN etc. at one place with graphical representation, which is easy to analyze.
Which broker is best for option trading?
Generally option trading requires fast execution of orders because of its highly volatile and high risk nature. Most of the brokers nowadays charge almost similar brokerage for option trading, so charges are not a big factor when selecting broker. And after SEBI’s new guidelines regarding margin requirements for trading, brokers are now could not provide more margins. Hence considering these three factors, margin, brokerage & fast execution of orders, we prefer Zerodha app as best for option trading.
