Financial markets are a dynamic medium and often rush in either direction quicker than most people assume the markets would. To keep up with it, you want to know how winners trade. This is where an option chain comes in as a winning recipe to gain in your trades.
An option chain lists all calls and put contracts for a given stock. The relevant data in an option chain that helps assess the state of the market are ‘bid’, ‘ask’, ‘net change,’ and ‘last price’. They further help you understand the intraday trading activity levels of a particular stock on any given day. The data captured puts together not just price and volume numbers but changes in open interest, or OI, and implied volatility, or IV.
Consequently, an option chain chart or an option chain matrix for a particular day is applicable for the next day. It gives you a definite indication of which stock is gaining momentum and which one is slowing down.
Build your Viable Option Matrix Strategy
An influx of new money into the market implies the OI, or open interest, will rise. When that happens, the prevailing trend doesn’t change – if the market was going sideways, up or down, it would continue doing so.
The opposite is true when the OI dips. It means the money is getting sucked out of the market, implying a trend reversal.
Each price has a corresponding volume indicator. The volume is the total number of contracts in the option chain and shows traders’ excitement about an index or security.
Implied volatility, or IV, shows how much the prices will swing. A low IV means the price swing would be low; a high IV implies a substantial price swing.
There are two approaches to the option chain data:
1) the index approach pertains to the index and the market as a whole;
2) there are the sectoral indices and stock-specific numbers as well. Together, they indicate if a particular stock can be bought or sold.
An option matrix is like a canvas with the painting of a particular security or even an index, such as the Bank Nifty Options Chain or Nifty Option Chain, brought together in the same frame. They help the trader identify the high-low liquidity levels. Such a liquidity range determines where the market is moving and the effectiveness and profitability of a trade. A reasonably skilled option chain user can figure out where the prices are headed.
Disclaimer: This article is not intended as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.