Know How Option Chain Works in India

You have posted a wonderful query, interested to learn about the option chains work?

With my experience I would like to describe the usual process involved in option chain analysis that in turn should define the option chain working.

How does an option chain work in stocks

Before getting into the crux of the matter, you must understand the elements that abide by the making of the option chain and more importantly, what is the option chain matrix as such.

An option chain contains a table of information divided into two sections namely calls and puts. The two communities, namely buyers and sellers of the underlying assets, take the respective information from the option chain matrix and arrive to make judgements on buying and selling issues.

Certain elements in the option chain matrix become important inputs to engage in buying/selling of option contracts. You can find those to be premium, strike price, expiry dates, open Interest, change in open interest, implied volatility, LTP, Net change, bid quantity, bid price, ask price, & ask quantity.

I would like to cite an example to make you understand how option chains work by applying it to Bank Nifty Options.

Bank Nifty Option Chain:

Source: NSE on 25 August 2023

The sample copy represents option contracts of bank Nifty and the set date of expiry is 31-Aug-2023. If you pay attention to the columns of the table, you can find all the elements described above, segregated into calls/puts.

If you are planning to go for Bank Nifty options then the tabulated nifty options chain data can help you to interpret several aspects such as:

The Bank Nifty option chain generates a clear dimension of, in the money/out of the money options. Wherever you find the strike shaded in yellow then it is in the In the Money (ITM) options, and the unshaded strikes are the out of the money (OTM) options. when the spot value of the Nifty changes, the shading does change correspondingly. Therefore, you can utilise this observation as a rule to the calls/puts.

You can make a proper evaluation of the liquidity and depth of the strike price.

Elements like bid/ask price and quantity provides sufficient info for the traders while they progress to apply the OTM options as the liquidity is pretty low in such cases.

In the index markets, the Bank Nifty option chain provides an early warning system through sharp moves or break outs in the index.

In an empirical test, if you observe a major change in Bank Nifty then its impact is observed in the Open Interest, and the volume shifts. However, the occurrence of Bank Nifty changes are due to the active participation of the FIIs, mutual funds and institutional investors.

Traders can position their trades accordingly with an abrupt shift in price/Implied Volatility of the underlying assets. Thereby, price/implied volatility can be viewed as an important parameter to alter trade positions.