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What is an Option Chain and How to Read it

 

What is an Option Chain and How to Read it

An options chain is defined as the option matrix in which all option contracts are available for a given security. In include calls, puts and their expiration, volume and strike prices and price information for a single underlying asset within a certain time period.

For beginners option chain looks like a complex maze of data. Option chain chart provides us in-depth information related to all stocks option contracts.
In this article we are going to read about the following topics:
• Option Chain
• How to read an option chain?

What is an Option Chain?
An Option chain is defined as the list in which all options contact is available for a particular asset. It can be divided in to two parts Call and Put.

A call option is a type of options that increases in value when underlying stock rises. They allow the owner to buy a specific option of underlying assets for a period of time. Call options gives you a higher gain with minimum risk involved in it than equity.
A call options gives you the right, but not the requirement to purchase a stock at a specific strike price by a specific date.

On the other hand, a put option that increases in value when the underlying stock falls. A put option is an option contract that gives the option buyer the right, but not the obligation, to sell the underlying stock. You can trade in different put option contracts including stocks, currencies, bonds, commodities, future and indexes. You can hold the put option till the expiration date.

The following are the components of the call or put options:
• Strike price: A particular price at which you can buy the underlying stock option
• Premium: Option price which you need to pay for either buyer or seller.
• Expiration: The date on which the option expires and settled.

How to read the option chain (Call/Put chain)?
Following are the components which helps you to understand the option chain.
1. Option type-There are two types of options; Call and Put. A call option price increases when the underlying stocks price increases. A call option is a contract that gives you the right but not the obligation to buy the underlying stock at a particular price for an expiration date.
A put option price increases when the underlying stock price decreases. Both the contract gives you the maximum gain with minimum risk than equity.
2. Strike price- Strike price is a price at which both the buyers and sellers of the specific option contracts are agree to execute a contract. When the price of an option becomes higher than the strike price your option trade will became profitable.
3. Option interest (OI)- Open interest can be defined as the interest of traders during exercise of a particular strike price. If there is more interest among the traders, there will be more liquidity to trade in the contract.
4. Change in Open interest- It tells you the change in interest among the traders or the number of contracts that are closed, exercised or squared off.
5. Volume- Volume can be defined as another indicator of the trader’s interest in a particular strike price of an option traded in the market. It is calculated on the daily basis.
6. Implied Volatility or IV: It shows the price swing, higher the implied volatility means higher swing prices or lower the implied volatility means lower swing price.
7. Net change- It is defined as the net change in LTP.
8. LTP- It is defined as the last traded price of an option.
9. Bid Price- The price Quoted in the last buy order is known as the Bid Price.
10.Bid Quantity- It is the total number of buy orders booked for a specific strike price.
11.Ask Quantity- It is the total number of open sell order for a specific strike price.
12.Ask Price- It is defined as the price quoted in the last sell order.

Conclusion
By deep study of Option chain it is concluded that it will help you to make an informed decision on your trade. You can earn a good profit with the minimum risk and will help you to manage your portfolio in a better way.
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