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. 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.
Examples of Option Chain
Let’s take an example of an option chain:
The above snapshots are taken from Yahoo Finance. Wherein, we are taking an example of Facebook Inc (Fb)
As shown in the example,
- Facebook Inc (Fb) is trading at 197.93 USD.
- Available Calls are with Strike Prices: 125, 130, 135, 215, 217.5 USD, etc.
- Available Puts are with Strike PricesStrike PricesExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.: 125, 130, 135, 140, 145 USD, etc.
The above charts are an example of an options chain for Facebook Inc.
- As we can see, it provides all details regarding available option contractsOption ContractsAn option contract provides the option holder the right to buy or sell the underlying asset on a specific date at a prespecified price. In contrast, the seller or writer of the option has no choice but obligated to deliver or buy the underlying asset if the option is exercised. for Facebook Inc.
- The above chart is usually provided by brokers on trading platforms. Some online stock trading platforms also provide such data, e.g., Yahoo Finance, Google Finance, Money Control.
- All the quotes in the market are represented in the form of option chains using real-time feed or delayed feed.
- A trader can analyze the market by looking at all the details provided in Option Chain and can take appropriate actions.
Characteristics of Option Chain
The following information is provided by option chain:
#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 will buy or sell 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 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. shows the topmost bid in the market for this contract. It is typically the best price at which a trader is ready to buy in the market. 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 will 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. shows the topmost ask in the market for this contract. It is typically the best price at which a trader is ready to sell in the market. 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 will be displayed in ask.
#7 – Change – Change shows the difference in the latest LTP and previous LTP. If LTP increases, the change will be positive, and if it decreases, the change will be negative.
#8 – % Change – % Change shows how much the latest LTP has changed from the previous LTP in terms of percentage. % Change is equaled to Change*100/Previous LTP.
#9 – Volume – Volume refers to the number of contracts being traded in a market for a particular contract. It shows the amount of liquidity in the market for this contract.
- For e.g., In a day, for a call option contract, there were many buyers and sellers in the market, but there was 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, there is a buyer who 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 the volume means higher the liquidity, i.e., higher the 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 interest refers to the number of open positions for a particular contract that has not been closed out, expired, or exercised so far.
- If a trader A has purchased 100 lots of a contract, trader B has sold 100 lots of this contract. In this case, both the traders have not closed out their positions yet. Hence, the total open interest at this point will be 100 lots.
- Now, trader A has sold 50 contracts to Trader C. Therefore, Trader A now has 50 buy open positions, trader B has 100 open sell positions, and trader C has 50 buy open positions. Hence, the total open interest at this point will be 100 lots.
- Now, trader B has purchased 80 lots, 40 each from trader A and C. Hence Total No of Open Interest is 20.
In the above example, if we try to calculate volume, it will be as follows:
- Total Volume = 100
- Total Volume = 100+50 = 150
- Total Volume = 100+50+80 = 230
Hence, volume kept on increasing, while open interest can increase, decrease, or remain constant.
Points to Remember
- If the difference between the asking price and bid price is higher, it indicates that liquidity for this contract is low and vice versa.
- When the last traded price (LTP) keeps on increasing, it shows an uptrend. If the market is an uptrend and at the same time, open interest also increases, indicates that new buyers are entering into the market, shows the market is bullish
- When LTP is increasing, but open interest is declining, it shows that either short sellers are coveringShort Sellers Are CoveringShort covering refers to buying already sold security which is borrowed in anticipation of a fall in price to cover the short position. A Short position is created by short-selling or selling of security initially borrowed with the expectation of buying at a lower price. positions or the buyers are closing out their positions. It means that money is being released from the market, shows that the market is bearishBearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market..
- When LTP is decreasing, it shows a downtrend. If the market is a downtrend, and at the same time, open interest is increasing, it indicates that new sellers are entering into the market, shows the market is bearish.
- When % change is greater, it shows that LTP is either increasing or decreasing sharply. When open interest is high, and LTP in the market drops sharply, indicates that the investors who had bought the contract at a higher price are now losing money and are ready to close out their positions at lower prices, indicating panic conditions.
The option chain provides a quick picture of all the available options for an asset. 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.
This has been a guide to What is Option Chain & its Definition. Here we discuss the characteristics of option chain along with examples. You can more learn about from the following articles –