How To Trade By Using An Option Chain?

How To Trade By Using An Option Chain?

When it comes to trading and investing in stock markets, there are multiple asset classes that a trader or investor can purchase and sell. Out of all these asset classes, derivatives, i.e. Futures & Options are considered the most volatile. Options are known for their volatility with the prices going from INR 1 to INR 20 in a day, amounting to a staggering return of 2000% in just 24 hours! 

However, with great potential and volatility comes great complexity, which is one of the most crucial things to understand while doing options trading. 

So, what is an option chain, or in fact what are options, to begin with? Let’s learn these in this article before you jump on to your options trading app

What are Options – Call & Put?

What is an Option? An option is a derivative product with which you get the rights to buy or sell the shares of an underlying asset at a pre-fixed price called the strike price before the date of expiry of the contract. However, it is up to you whether you wish to execute the contract or not as there is no obligation to do so.

Now, since a trader can either want to buy or sell the underlying security, there are two kinds of options to fulfil both purposes. A call is an options contract that bestows you with the right to buy the share of its underlying asset. Whereas with a put option, you get the selling rights for the shares of the underlying asset which can be executed by you at the mentioned strike price by the contract’s expiry.

The Concept of Open Interest 

Unlike equities, where it is majorly about price and volume (number of times a share has been traded), derivatives contracts, i.e. Futures & Options are characterised by an additional unique measure – Open Interest. But what is open interest? 

Every option contract traded in the market will have open positions, i.e. positions that have not been exercised, or where the right to buy or sell has not been used yet. Every time a trader conducts their initial trade for an option, they create an open position against that contract. The summation of all such open positions for a contract is called Open Interest, as their countertrade is yet to take place.

What is an Option Chain and how is it used?

An Option Chain is the coalition of all information related to the options of an underlying security for a specified expiry date. It contains the list of all call and put contracts, with their last trading price, total open interest, change in open interest, volume, and at times, measures the implied volatility, and the bid/ask price and quantity. 

It is a vital piece of information available on an options trading app, which helps traders see and understand the liquidity and volatility of all option contracts. 

By a glance, you can know the trading prices and compare them one on one for different strike prices to find out which one suits your risk appetite. Coupled with the information on implied volatility, it helps measure the risks associated with each contract and enables a trader to make a wise decision.  

Conclusion

Thus, the next time when you open your options trading app, watch out for the option chain as now you know how instrumental it is in options trading, and deploy it to your benefit! On a single screen, you can see a plethora of information associated with all the option contracts of the underlying security.

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