Options trading gains popularity among traders for its flexibility, utilization, and ability to handle risk. But in order to make informed decisions, traders must understand how to read and analyse alternative chains. An alternative chain, also called the Options Matrix, provides all available alternative contracts for a specific stock or index single view.

What is an Option Chain?

An option chain is a list of all available calls, and a specific underlying asset sets an alternative contract, for example, with details:

• Strike prices

• Premium (option price)

• Open interest (OI)

• Volume

• Expiry dates

• Ask bids/prices

This option acts as a snapshot of demand, supply, and spirit in the market.

Key Components of an Option Chain

1. Call (CE) and PUT (PE) options

• Call (CE): Buyer provides rights (liability) for buying the underlying asset.

• Puts (PE): Do not provide rights (liability) to the buyer to sell the underlying property.

Alternative chain shows call on one side and puts on another for easy comparison.

2. Strike Price

The predetermined value that the option can be used for. Strike prices are listed in the centre of the chain.

3. Premium (Last Traded Price – LTP)

The price at which the option is currently trading. The prize depends on factors such as expiry, instability, and time for internal value.

4. Open interest (oi)

The outstanding exit indicates the total number of contracts. High OI reflects strong market activity and interest in the strike price.

5. Volume

The number of contracts that do business during the day. High volume means that the strike is actively traded.

How to Analyze an Option Chain

1. Identify support and resistance levels

• High conversation OI at the strike price often acts as resistance.

• High put OI at the strike price often works as support.

2. Look for a change in open interest

• Rising Call OI = bearish sentiment (more traders expect the price to stay below that strike).

• Rising Put OI = bullish sentiment (more traders expect the price to stay above that strike).

3. Monitor inherent Volatility

• High IV suggests expensive prizes and more uncertainty.

• Smaller IV indicates cheaper options and calmer markets.

4. Watch Volume Along with OI

If both volume and OI grow, it confirms a strong interest in that strike.

Example: Using an Option Chain

Suppose nifty trading to 19,800:

• High Set OI 19, 700 → In strong support zone.

• 20,000 → High conversion OI in resistance field.

This suggests that Nifty can trade within this area until Oi is significantly offset.

Conclusion

Reading and analyzing an option chain is a skill every options trader must develop. By studying open interest, premiums, volumes, and implied volatility, traders can gauge market sentiment, identify support and resistance zones, and make smarter decisions. Remember, option chains don’t guarantee outcomes, but they provide powerful insights to enhance your trading strategies.

Read Also 

The misconception of Option trading
How to Use the Box Spread Strategy for Safe, Fixed Profits