Today, most investors have started using option chains to read, understand, and represent information. This framework has simplified the trading process by presenting crucial information in a concise and organized manner. The information details various stock options.
Option Chain
The option chain contains a list of all option contracts including puts and calls for an asset. Also called Option Matrix, the traders take the help of the option chain to know the direction of price movements, level of liquidity, assess the depth of some strikes, etc.
In an options chain, you get to know about the executed price, real-time bid price, ask price, ask quantity, volume change, change in implied volatility, open interest change, etc. The traders fetch comprehensive details for the options including expiration date, strike price, and premium. According to their trading strategy and market knowledge, they buy and sell options using the option chain.
5 Ways to Read and Interpret Option Chains
Option Chains have become a critical tool for options traders. The options chain contains all the available options of an underlying asset. If you are a trader, it is important for you to know what is options chain, how to read and interpret it, and how to use it to make informed trading decisions. Let us know the best ways to view and understand the options chain.
1: Strike Price
A strike price means a price at which the trader can exercise the option. It is important to choose a strike price based on your trading goals, risk appetite, market trends, etc. Reading the option chain will help you know the strike price for every stock along with the expiry date. Using the data, you can easily choose your underlying security according to your needs.
Citing an example, if you think that a price is going to increase, then buy call options that have a higher strike price compared to the present market price. Alternatively, in case a stock price is going to decline, then buy put options with a strike price lesser than the present market price.
2: Underlying Asset
To read and understand the options chain, you need to know well about the underlying asset whether a stock or an index or any other type of financial asset. Experienced traders study the underlying asset on Options Trading App based on its price, volatility, and other trends. You can also make your buying and selling decisions based on these details.
3: Date of expiry
Since every option comes with an expiration date, it is important to consider the same at the time of reading the options chain. The date of expiration means when is the last date of the option when it can be used. You can study the option chain and decide whether to buy or sell a particular option with its given expiration dates. While using the options chain, ensure to select the expiration date as per your trading goals and technique for a stock.
For example, if you think that the price of a particular stock is going to increase in the next few months, you may buy a call option with an expiry date of after a few months. Otherwise, if you perceive that a stock is going to have a downward price trend in the coming week, you can buy a put option that has an impending expiration date.
4: Bid and Ask
Bid and ask are the two important components of the options chain. You can also view the bid-ask spread which underlines the difference between the highest buyer price or ‘bid’ and the price a seller is ready to take or ‘ask’. Using the same, you can project the liquidity as well as transaction costs.
The factors that affect the bid and ask are the stock liquidity, expiration date, and strike price. If a stock call option has an expiration date and a narrow strike price showcases good liquidity, you may get the same for a good price. For a wider bid-ask spread, you may not get a good price easily.
5: IV
IV or Implied Volatility is another important component that measures the movement in the price of an asset. When you make a trading game, ensure to see the option’s implied volatility as the same affects the cost and profitability of the option. You can find the implied volatility column in the options chain. If the implied volatility of an option is high, you may expect high price movement. Accordingly, make informed decisions.
Wrapping up
Other than the ones mentioned above, use other parameters too like LTP, Open interest, Greeks, search feature, etc. on Options Strategy Builder. Option Chain offers single-click access to several listed options. So, rather than searching for the entire script name, use the options chain and take the best trading decision. Option chain allows you to access all the strike prices with a range of expiries of an asset.
