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Option Chain Analysis For Beginners

2 Min 01 Mar 2023 0 COMMENT

What do you think of when I say the word information. You may think your search engine results, news, a boring lecture, this book that book, sure why not! But how many of you thought of something like periodic table, your Chemistry teacher's favourite tool to torture you.

Most of you may not know or remember how to read the table but it still remains, perhaps the most commonly used way to convey basic details about chemical elements. After all, tables are just awesome. It still doesn't surprise me when people first see option chain analysis chart for the first time and get really overwhelmed. This here my friends is an option chain, and while it may look formidable and confusing, you shouldn't worry because I am here to demystify it for you.

See an option chain is nothing but the detailed listing of all the contracts of a given stock or index. This is where you see all the relevant info. Let me first take you through the basic terms, you'd notice calls and puts. As a buyer you buy a call when you expect the price of the underlying stock or index to go up, but you buy a put when you expect the stock or index level to go down. Regardless, the buyer and seller have to agree to a price to carry the transaction out and that price is what we refer to as the strike price.

Then, there's oi or open interest which tells you the degree of trader interest for that particular strike price. These are expressed in percentages. Higher the percent you see the greater the trader interest. Next up we have volume, which also indicates the extent of trader interest along with the number of contracts traded during the day for that particular strike price. Right next to volume is IV which stands for implied volatility. As the name suggests IV tells you about the degree of volatility in prices. High volatility hints at high swings in prices.

You may be aware of the next ones, bid quantity and ask quantity refer to the number of buy orders and open sell orders for that strike price respectively. Along similar lines we have bid price and ask price, which refer to the most recent values quoted to buy and sell that option at that strike price respectively. And with this I have dutifully introduced you to all the basic terms concerning the option chain, but there's still stuff you need to know about how the option chain actually works, but that's something for another time.