Option Chain

Updated on May 3, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Option Chain?

An Option chain is a detailed representation of all available option contracts for an asset (stock, index, currency, commodity) and provides a quick picture of all available put optionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated.read more and calls options of the asset along with their pricing, volume, open interest details, which could be advantageous for a trader to analyze the market and take appropriate and immediate actions.

What Is Option Chain

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The option chain provides a quick picture of an asset’s available options. It helps the trader to analyze the market by analyzing the liquidity, trend, the volume being traded, open positions, and movement of prices. It helps the trader to take immediate action on sudden market moves.

Key Takeaways

  • An option chain serves as a comprehensive representation of available put and call contracts for a specific asset. 
  • This detailed overview encompasses vital pricing, volume, and open interest data. This information empowers traders with insights to assess the market’s condition and make informed decisions swiftly. 
  • The option chain presents several key attributes, including the contract’s name, the latest trade data, the strike price, Last Traded Price (LTP), changes in value, change percentages, trading volume, and open interest. These elements collectively furnish traders with valuable information to gauge market dynamics and potential trading opportunities.

Option Chain Explained

Option chain data is a list of all the available contracts related to the option of a particular underlying asset, which may be an index, a commodity, or a stock. It gives details about their strike prices, expiration dates, volumes, open interest and the premiums.

The investors and option trader use these details to compare and analyse the various option contracts, make an assessment of their potential profitability or their premium amount and based on the above data, make some informed decisions about whether to make investments and decise the trading strategies.

The option chain analysis data provides a very comprehensive view for all the available options for any particular underlying asset. This helps in understanding and selecting the correct option for trading or investment purpose.

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Characteristics

The option chain analysis provides the following information:

Characteristics of Option chain

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#1 – Contract Name – The contract name is a name given to the contract for identification.

#2 – Last Trade Date – The last trade date specifies the date and time at which the last trade occurred. Trade here refers to the matching of prices by buyer and seller.

#3 – Strike Price – An option is a contract in which an owner buys or sells an asset at an agreed price at an agreed date. The strike price is an agreed price at which the owner will buy or sell the asset on expiry.

#4 – Last Traded Price (LTP) – The last traded price in the option chain data is the last price at which trade occurred on the option contract.

#5 – Bid Price – Bid priceBid PriceBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more shows this contract’s topmost bid in the market. It is typically the best market price a trader is ready to buy. If one buyer is ready to buy at 50 USD and the other is ready to buy at 55 USD, then the buyer with 55 USD will come at the top and be displayed in the bid.

#6 – Ask Price – Ask priceAsk PriceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more shows this contract’s topmost ask in the market. It is typically the best market price a trader is ready to sell. If one seller is ready to sell at 50 USD and the other is ready to sell at 55 USD, then a seller with 50 USD will come at the top and be displayed in the task.

#7 – Change shows the difference between the latest and previous LTP. If LTP increases, the change will be positive, and if it decreases, it will be negative.

#8 – % Change – % Change shows how much the latest LTP has changed from the previous LTP in percentage. % Change is equaled to Change*100/Previous LTP.

#9 – Volume – Volume refers to the number of contracts traded in a market for a particular contract. It shows the amount of liquidity in the market for this contract.

  • E.g., In a day, for a call option contract, there were many buyers and sellers in the market, but no trade happened, i.e., there was a transaction between buyer and seller. In this case, the volume will be zero.
  • On the other hand, a buyer purchased 50 Qty of this option from a seller. In this case, 50 will be the volume.
  • Volume depicts the amount of liquidity in the market. Higher volume means higher liquidity, i.e., higher investors are interested in this security. When volume is higher, it would be easier for a trader to buy and square off easily.

#10 – Open Interest – Open interestOpen InterestOpen interest refers to the total outstanding or open contracts in a derivative market at any time. The quantitative value shows the total number of contracts that have yet to be liquidated in the market. It is frequently observed in conjunction with data from the futures and options markets.read more refers to the number of open positions for a particular contract that has not been closed out, expired, or exercised so far.

For example,

If trader A has purchased 100 lots of a contract, trader B has sold 100 lots of this contract. In this case, both traders have not closed out their positions yet. Hence, the total open interest at this point will be 100 lots.

NameLongShort
Trader A100
Trader B100

Now, trader A has sold 50 contracts to Trader C. Therefore, Trader A now has 50 open buy positions, trader B has 100 open sell positions, and Trader C has 50 open buy positions. Hence, the total open interest at this point will be 100 lots.

NameLongShort
Trader A50
Trader B100
Trader C50

Trader B has purchased 80 lots, 40 each, from traders A and C. Hence Total No of Open Interests is 20.

In the above example, if we try to calculate volume, it will be as follows:

  1. Total Volume = 100
  2. Total Volume = 100+50 = 150
  3. Total Volume = 100+50+80 = 230
NameLongShort
Trader A10
Trader B20
Trader C10

Hence, volume kept on increasing, while open interest can increase, decrease, or remain constant.

Examples

Let’s take an example of an option chain:

Option Chain (snapshots)
Snapshots 1
Snapshots 1-1

Source: finance.yahoo.com

The above snapshots are taken from Yahoo Finance. Wherein, we are taking an example of Facebook Inc (Fb)

As shown in the example,

The above charts are an example of an options chain for Facebook Inc.

Trading Strategy

Let us understand the trading strategies traders use after interpreting the information in the stock or currency option chain.

Option Chain Vs Price Action

Both the above terms represent two different approaches that are used for financial market analysis. But it is important o identify the differences between them.

  • The stock or currency option chain is a list of all the available option contracts for a financial asset whereas the latter is the study of price movements of a financial asset over a period of time in charts.
  • The former shows the security’s call and put option details, but the latter shows the security chart formation, trend lines, candlestick patterns, trading volumes, etc., of the security.
  • The former provides information about the open interest, volume, bid and ask prices for the option contracts but the latter provides information about the support and resistance levels, trends, patterns etc.
  • The option chain chart focus on volatility, market sentiments and future potential of optionstrading whereas the latter focus on price movements to identify the security’s behavior and entry or exit points.
  • The former applies to only options but the latter applies to various types of financial instruments.

Frequently Asked Questions (FAQs)

1. What is the relevance of an option chain?

An option chain is a critical tool for traders and investors as it provides a comprehensive overview of available options contracts for a particular underlying asset. It displays the various strike prices, expiration dates, and corresponding premiums. Traders use option chains to analyze and select suitable options based on their trading strategies, risk tolerance, and market expectations.

2. What is implied volatility in an option chain?

Implied volatility is a key metric in an option chain that reflects market expectations about future price fluctuations. It represents the market’s estimate of potential price changes and is derived from option prices. High implied volatility indicates greater uncertainty, while low implied volatility suggests relative stability. Traders use this measure to assess potential risks and opportunities in options trading.

3. How often is an option chain updated?

Option chains are regularly updated throughout trading hours, providing real-time data on options contracts. The frequency of updates depends on the specific trading platform or financial service provider. Generally, option chains are refreshed continuously or at specific intervals to reflect changing market conditions and prices.

This has been a guide to what is Option Chain. We explain its trading strategy along with examples, differences with price action and its characteristics. You can learn more about from the following articles –

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