Option chain is the listing of all possible strike prices along with the available option contract price & their related financial data. In short option chain, is the essential data which needed to be analyzed by the investors before placing any options trade. So here in this tutorial, we are going to demonstrate how to view an option chain at NSE website, plus how to decide a trade by studying the option chain step by step.
For the new trader who have no idea about options trading, please check the basic of options trading, terms from here:
How to view option chain on NSE website:
In order to view the NSE option chain with equity, indices, currencies, you need open following links:
After opening the link, from the “view options contract for” drop-down list, select an option contract, or you can type any equity or stock quote and click on the “Go” button to get the option chain for your chosen stocks. Also, you can view option chain for specific option expiry date. By default its shows option chain for the recent expiry date. We will explain this later.
Option Chain Terms:
In order to read the option chain you need to know each of its terms:
The price on which both options buyers & sellers complies with each other for the options contract.
The price which buyers agreed to pay per option contract. When an investor wants to sell an option contract, he/she has to sell it to a buyer with a certain bid price.
Here bid quantity refers to the total amount of option contracts on the buyer’s side.
The price which sellers agreed to receive for an option contract. When an investor wants to buy an option contract, he/she has to buy it from a seller with a certain ask price.
Here ask quantity refers to the total amount of option contracts on the seller’s side.
Stands for last traded price of an option contract.
Net changes of option contract with last traded price
The total number of all outstanding option contracts. Here in NSE option chain, it has both for Call option & Put option.
Change in OI:
The number of changes with all outstanding option contracts, i.e open interest. This is also shown two times for each of the call & put option type.
IV stands for Implied volatility. This is a parameter in the black Scholes Merton pricing formula. How to use it for finding call option & put option premium will explain later.
The volume of the call & put option contract on a specific strike price.
Open Graph of Option Contract:
You can view the graph of an option contract at a specific strike price. But clicking on the chart arrow button, it will open the graph in a new window. But make sure your adobe flash player is updated to its latest version & google chrome or your web browser allows playing flash. In Chrome this is very easy.
Not doing this step will show you an error saying “Please upgrade your adobe flash”.
In the chart, starting from the stock market opening, for a specific option contract, shows two sets of data with time series. One is the underlying asset price, in this example below, it shows the current price of NIFTY. Another one is the contract price, more noticeably the strike price. Below is the chart for NIFTY call option with a strike rate of 10900.
If you bought this specific option contract, then this graph will come handy.
Compare Option Price:
Suppose you can want to buy NIFTY call option at a strike rate of 10900, pricing INR 59.00 per option contract. If you want to get a better deal. Then you can check all available option prices for different option contract with a different expiry date. For this, you only need to click on that specific strike price & it will show you all available option contracts with that strike price.
Choosing a Good Trade:
Following factors are very essential for choosing a good option trade from the option chain listing.
In money options:
You will notice, some option contracts are highlighted with yellow color. Those options are already in profit. Means, the current price of the underlying is higher than the strike price in case of call option. For this reason, in money options are costly. But if you can effort it, then you can buy in money options. Although your ROI, return on investment will be lower in this case.
Increment in Open Interest:
There is a deep connection between increment in open interest & underlying price. If price & OI(open interest) both increases, that indicates traders on buyer side. If price falls & OI(open interest) increases that indicates traders on seller side.
Increment in Volume:
Volume is also connected with the underlying price same way as with open interest. Below depiction will explain it better.
Price Open Interest Volume Trader’s Viewpoint Rising Rising Rising Bullish Rising Falling Falling Weak bullish trend, possible reversal Falling Rising Rising Bearish Falling Falling Falling Weak bearish trend, possible reversal
NSE has a page where investor can find the list of equities which open interest has increased recently.
It is done on the underlying price chart itself. This is the final anlaysis which trades conduct before placing any option trades. Technical analysis can be done with various indicators like moving averages, price action & also with oscillators. We will explain it soon.
BANK NIFTY Options Chain
Bank NIFTY currently quoating at 26,786.
In this hourly chart of bank nifty we have added Bollinger band indicator. By looking at the chart, we can see the market is bearish & is in a range between 26950 & 26650. Now, we will look at the option chain of FEB 28, 2019 contract. Its just one day from today. That’s why we are analyzing the hourly chart, not a daily chart.
By looking at the option chain we can see, 26900 & 27000 put options are already at “in money” position. So if we plan to buy put options of 26900 then how much it will cost us? Let us calculate this with our Black Scholes options calculator, along with Greeks.
Our Derivative Calculator
In this calculator put option premium showing INR 195.60, which is slightly different the INR 192.95. Well, the market fluctuates very fast. Therefore price changes.
Minimum lot size for BANKNIFTY is 20, thus your cost of buying one lot BANKNIFTY put option would be, (195.60 * 20) = INR 3912 + brokerage charges. If you trade with upstox then your brokerage charges will be very low only INR 20.
INR 3912 is the max risked money that you will lose if tomorrow BANKNIFTY closes above 26900.
otherwise, if BANKNIFTY closes below 26900 then you will be in a profitable position. Profit is unlimited.
With Greek, we can calculate how much profit you can make per price movement.
The Greeks Factor:
The gamma, delta, vega, rho are the 4 greek factors in options pricing. We will explain more about it, in our next tutorial. For now, in order to calculate our profit in a different scenario, we will only look at the “put option delta” part in the picture above.
|If BANKNIFTY closes at 26,500||If BANKNIFTY closes at 27,100|
Current price 26,786
Range = 286
Put option delta = -0.634
so, (-0.634*286) equals -181.32
Current premium = 195.60
as the market falls below the strike price,
Current price 26,786
Range = 314
Put option delta = -0.634
so, (-0.634*314) equals -199.07
Current premium = 195.60
as the market move above the strike price,
So the new premium will be (195.60 – 199.07) = -3.47
Before you start trading with options, you need to understand the basics of options trading first. More you will study & practice in the real market, you will learn how to work with it. Understanding the price structure, market bias is also important. It is important to take a look at underlying asset chart, before placing the option trade. It works in a sequence; first, you look for those stocks or equities which have open interest sprouts, then choose one & do the technical analysis of that asset, mark zones. Lastly choose the right strike price to execute the options trade.
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