Though option chains might appear complex, they are actually very useful for traders. An option chain is a list of all the different options contracts that are available for a particular stock or asset, showing prices and dates.
It is important that traders understand option chains because they give valuable insight into market sentiment and possible profit prospects. Traders can also make informed decisions, manage risks and improve overall trading strategies by learning the basics of option chains.
In this beginner’s guide, we will learn about what an option chain is and how to read it.
What is an Option Chain?
An option chain is a table that displays all the option agreements for a specific security, including both puts and calls. It’s also called an option matrix. Option chains help traders get an idea about the kind of options available on a certain underlying asset.
An option chain is usually divided into two sections: calls and puts. A call option gives you the right to buy an underlying asset at a particular price and within the option’s expiration date but not the obligation. A put option gives you the right to sell an underlying asset at a particular price and within the option’s expiration date without any obligation.
The strike price is the price at which either a put or call can be exercised and it normally appears in the middle column of an option chain table. Each row of the table represents a strike price where both call and put options are available.
Option chains can assist traders in:
- Identify the direction of price movements
- Identify points of high or low liquidity
- Evaluate the depth and liquidity of specific strikes
- Find out the Option premium against the corresponding maturity date and strike prices
This tool is essential for traders as it enables them to analyze and compare different options contracts, make informed trading decisions, and effectively manage their trading strategies. To boost your skills, you can also take up basic share market courses on Upsurge.club.
How to Read an Option Chain
For a beginner, reading an option chain can be a bit difficult but this is an essential tool for comprehension of the options market. Here is a step-by-step approach to how to read an option chain.
- Identify the underlying asset and expiration date: Ensure you are looking at the correct options in the chart.
- Understand the axes: The horizontal axis usually shows the price of the underlying asset, while the vertical axis shows the profit or loss at different prices.
- Understand the columns: The columns in an option chain are usually strike, symbol, last, change, bid, ask, volume, and open interest.
- Understand the strike price: The strike price is in the center of the option chain frame, and data for calls and puts on the same strike are next to each other.
- Understand the calls and puts: Calls are usually on the left side of the option chain, and puts are usually on the right side.
- Understand the bid and ask prices: These prices show at what price buying and selling requests are being filled.
- Understand the volume: This shows the total number of contracts created over the day.
- Understand the open interest: This shows the total number of contracts created but not yet closed out.
Remember, the option chain provides detailed quote and price information and should not be confused with an options series or cycle, which instead simply denotes the available strike prices or expiration dates. It’s also important to note that the options chain is updated in real-time showing the last price, trading volume, and best bid and offer for the calls and puts of an options series.
Conclusion
In the end, it’s clear that understanding option chains is a key step in your trading journey. The option trading basics from Upsurge.club can help you learn more about this derivative tool. Remember, the stock market is a big world, and option chains are just one tool to help you find your way. Keep learning, keep practicing, and you’ll be navigating the market like a pro in no time.
