Option Chain Analysis – Making F&O Trade a Smooth Ride

When it comes to trading in the Futures and Options (F&O) segment, the ability to interpret real-time data is essential. HDFC Sky’s Option Chain Analysis serves as a powerful tool to help traders predict market trends, identify support and resistance levels, and make informed decisions. 

This guide aims to simplify the concept of option chain analysis so that both beginners and seasoned traders can utilise it effectively for smoother trades. 

Before you begin trading, it’s crucial to open demat account, as it allows you to hold and manage your investments effectively.

What is an Option Chain?

An option chain is a matrix that provides detailed information about all available option contracts for a specific stock or index. It includes various strike prices, open interest, volume, and premium, making it a one-stop tool for traders. 

Typically, traders look at both the call options and put options for a particular stock or index, focusing on various columns like strike price, open interest, and more. On platforms like HDFC SKY, you can quickly access the Option Chain from the company page to see the top three options contracts of the nearest expiry.

How Can F&O Traders Benefit from Option Chain Analysis?

The following are some of the benefits of HDFC Sky’s Option Chain Analysis

1. Informed Decision-Making

Option Chain Analysis is a valuable tool for identifying the true trend of a specific stock or index. Typically, institutions and large funds are involved in selling options. By examining which strike price has the highest open interest, traders can gain insights into the support and resistance levels of security—whether it’s stocks or indices—pertaining to that expiry. The put strike with the highest open interest is regarded as strong support, while the call strike with the highest open interest is viewed as strong resistance.

2. Ease of Trading

The option chain gives traders a bird’s-eye view of all available strike prices for a particular stock or index in one place. This simplicity allows traders to make decisions based on complete data rather than scattered information. With platforms like HDFC SKY share market app, traders can select different expiries and execute trades directly from the same window, making trading much easier and faster.

Key Features Available in Option Chain 

The following are the features of the Option Chain 

1. Strike Price

The strike price refers to the price at which a trader may choose to buy or sell the underlying asset, depending on whether they are trading in a Call Option or Put Option. In an option chain, traders can sort strike prices from highest to lowest and vice versa. This helps them quickly identify the relevant strike prices for their trading strategy.

2. Open Interest (OI)

Open Interest reflects the total outstanding contracts for a given strike price, indicating market activity levels. Traders can view open interest for both call and put sides. A high open interest on a put strike typically signals strong support, while a high level on a call strike suggests strong resistance. This concentration helps traders predict stock movements effectively.

3. Change in Open Interest (OI Change)

This column shows the change in open interest from the previous day’s close to the current day’s close. A rising open interest indicates that more traders are entering the market, either by buying or selling contracts. A decreasing open interest suggests that traders are unwinding their positions. This metric helps traders understand whether a trend is strengthening or weakening.

4. Last Traded Price (LTP)

The LTP is the most recent price at which a contract was traded. For F&O traders, monitoring the LTP provides real-time data on the market value of the option contract.

5. Net Change

This column tracks the change in the LTP from the previous trading day. A positive net change indicates a price increase, while a negative one shows a decrease. By tracking this data, traders can gauge short-term trends.

How to Analyse Option Chain Data

When analysing the option chain for Nifty 50, for instance, expiring on 28/09/2023, put data that appears on the right and call data on the left. The current spot price is highlighted in blue, with the nearest strike designated as the At-The-Money (ATM) option, while In-The-Money (ITM) options are shaded in yellow. 

The put strike with the highest open interest indicates strong support, whereas the call strike with the highest open interest signifies strong resistance. Changes in open interest can signal potential market movements. 

Additionally, the open interest bar line enables traders to easily identify strikes with the highest open interest, thereby assisting in their decision-making process.

Option Greeks

For more advanced traders, Option Greeks are essential tools for understanding how various factors like time and volatility affect the price of an option. Some key Option Greeks include:

• Delta: Measures the change in an option’s price due to changes in the underlying asset’s price.
• Gamma: Indicates how much Delta will change as the price of the underlying asset fluctuates.
• Theta: Represents the rate of time decay in an option’s price, highlighting how much value is lost as the contract nears expiry.
• Vega: Measures the sensitivity of an option’s price to changes in implied volatility.
• Rho: Represents the rate of change in the price of an option due to fluctuations in interest rates.

How to Place a Trade from the Option Chain

Placing a trade directly from the option chain is simple and convenient. Here’s how:

Step 1:

Click on either the Call or Put option for your desired strike price. This will bring up a trade review screen, where you can choose to Buy or Sell the option.

Step 2:

Enter the number of lots you want to trade. Each contract has a defined lot size, and you can specify how many lots to buy or sell.

Step 3:

Select whether you want to trade Intraday or Normal (Carry Forward). Then, choose the order type (Market, Limit, or Stop Loss). The system will calculate the margin required and provide an estimate of the total charges. Once all the details are confirmed, click on “Review Buy Order” to execute the trade.

Conclusion

Option Chain Analysis offers a wealth of information that can help traders make better decisions, identify support and resistance levels, and manage their trades efficiently. To fully leverage these insights, having a demat account is essential, allowing traders to execute their strategies effectively

By understanding the data presented in the option chain, traders can gain insights into market trends and fine-tune their trading strategies for better results.