Here, in this article, I try to explain the Option Chain Analysis in Trading. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts. In this article, I am going to discuss the Option Chain Analysis in Trading. Please read our previous article where we discussed Opening Range Breakout with examples. At the end of this article, you will understand the following pointers in detail which are related to Option Chain Analysis.

  1. For our discussion henceforth in this chapter, keep in mind that when we talk about volume and open interest, we are talking about them for option contracts only.
  2. Many of these books are also enumerated as reference resources for various futures and options courses.
  3. As OTM Calls have strikes that are above the underlying price, the strike price of OTM Calls often acts as resistance for the underlying price.
  4. In the columns following the four listed above, you will find important information to gauge market size for a given option and how traders are committed at each price level.
  5. We can see from the above screen of option chain that at the strike price of 16,000 the open interest is maximum.

Trading an asset that is not liquid is risky because of various factors such as choppy price movements, high transaction costs, difficulty in entering and existing trades at the desired price and time, etc. There are a few ways to check for liquidity and one of them is to look at the volume and open interest statistics of an option contract. Well, volume and open interest are two different concepts, yet are very closely related to each other. Let us now see what these two variables represent and why it is so crucial to understand them as well as to monitor them when entering an option trade and after having entered an option trade.

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Let us take the example of Reliance Industries Ltd, which is India’s largest company by market capitalization. If you observe the Option Chain, you will see that around half of the Calls and around half of the Puts are shaded in light brown, while the remaining are non-shaded i.e. in white. Well, if you notice, you will see that the shaded Calls options are at the top half, while the shaded Put options are at the bottom half. In brief, open interest that confirms the price action is supportive of the move in the price and indicates that the current trend is healthy and is likely to continue.

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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. Once it has been visually determined that an option contract has decent volumes and hence is tradeable, a trader can then use volumes to validate trading signals. Generally, the higher the volume, the greater is the trading interest in the option contract and vice versa. For instance, an up move in option price that is accompanied by an increase in volume is considered as a bullish signal, because it indicates at an increase in buying interest. Below mentioned are some general guidelines related to volume and price of an option.

While writing this crucial piece of work, the author seems to have immersed himself into the sea of historical data and patterns around the volatility of options stocks. And from this analysis, he has been able to deduce certain very crucial observations such as the relationships between SPX and VIX, or irregularity in VIX prediction. However, to some readers, this book may pose a gap between the theoretical models and the reality of options trading. But that doesn’t mean that the foundations of options trading that have been covered in this text aren’t useful. The answer lies in the background of the author who, since 1982, was an independent market maker in equity options at Chicago Board Options Exchange but he quickly shifted towards options trading.

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You’ll learn about the strategies used by professional traders, how to manage risk, and how to make the most out of your investments. What’s more, you’ll gain access to some of the most successful traders’ option chain analysis books secrets and insights. Some of the essential basics of options trading such as pricing, dividends, volatility skew, implied distributions, and PCR in option chain have been thoroughly covered in this book.

This is a sign that traders who had built long positions could be liquidating their longs, either to book profits or to cover losses.Now notice the boxes in black. Here, the open interest has mostly decreased while the Put premiums have increased. This is a sign that those who had built short positions could be covering their shorts, possibly to book profits or cover losses.

Depending on the presentation of the data, bid-ask quotes, or mid-quotes, are also displayable within an option chain. 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. Having said that, before trading stock options, we would suggest the reader to look at the individual Option Chain monitor to find out whether or not theseinstruments are liquid at any given point in time.

These titles were selected based on author credentials, reader reviews, and any relevant awards. The goal of this paper is to study the relationship between an Index Options Open Interest and the Underlying Price, and examine the Predictable Power of Index Options Open Interest. The objective is to validate the predictable power of Index Options Open Interest in predicting the Trend of the underlying. Daily data of Nifty Index Options Chain for the period of one quarter has been employed. Let us now take the example of Bajaj Finance, which is a stock that is a part of the Nifty index and also has decent activity in the Options segment. Now that we know how to search for the Option Chain of an underlying that is traded on the NSE, let us decipher each element of the Option Chain.

At these strikes, the open interest has mostly increased and so have the Put premiums. This is a sign that fresh long positions are being built in Put options, which has bearish implications. When trading an option, it is important to ensure that there is enough liquidity among the option contracts that one wants to trade.

On the other hand, if a buyer and a seller are both closing out their existing positions, open interest reduces by 1 contract. 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. Open interest refers to total number of option contracts that have been created but have not yet been closed out. In other words, it refers to the total number of open option positions till date. For instance, an open interest of 500 means that there are 500 contracts that have been created over the life of the option contract but have yet to be closed out.

Hence, the number of buyers will always be equal to the number of sellers. Now coming back to our main discussion, at any point in time, open interest could change or remain the same depending upon the type of transaction. For instance, if both sides to the transaction (i.e. long and short) are new or old, open interest will change. This list of books on options trading has been designed keeping in mind a varied scale of experience among the trader’s community. An options chain, also known as an options matrix, is a listing of all available options contracts for a given security.

The chapters within cover the concepts like what does option chain indicate and all the essential beginners level options trading strategies that are comprehensible as well as implementable. The majority of online brokers and stock trading platforms display option quotes in the form of an option chain using real-time or delayed data. The chain display allows quick scanning of activity, open interest, and price changes. Traders can hone in on the specific options required to meet a particular options strategy.

For short-term trading, one can complement Option Chain analysis and Technical analysis to make informed trading decisions. Options trading is particularly popular with traders who regularly trade the commodity futures 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. Consequently, his book contains actionable information on swaps and other derivative instruments, trading interest rate futures and strategies for estimating the time value of options.