How do you read an option chain analysis?
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How to read an Option Chain
You have popped up a nice question on ways to analyse option chains. Such thoughts will arise only when you are determined to book profits in share markets.
Let me tell you, having minimum experience in analysing option chains, I could make decent money in option contracts. Below I share a significant way of analysing option chains on Indian Derivatives.
Benefits of Option Chain Analysis
Usually before the begin of a trade, trader will apply option chain analysis methodology to derive specific aspects. They can be specified as:
Parameters to Analyse Option Contracts in Option Chain:
Charting: Charting is pictorial representation of the option contracts of an underlying asset and the charting techniques include bar charts, line charts, and candlestick charts.
Technical Analysis: By adopting mathematical and statistical modeling the technical analysis will help you in identifying stock patterns, and trends in the NSE/BSE markets.
The patterns include support, and resistance levels, trend lines and specific technical indicators that enable for better decision making on a trade.
Fundamental Analysis: The price of the options are highly dependent on the economic indicators such as company’s performance, reports, and news events. In fact, you will be able to define the intrinsic value of your chosen option that helps you to have accuracy in trading decisions.
Greek Analysis: It enables you in understanding the sensitivities of the options in respect to different market factors. These can be marked as asset price, volatility, and the time decay. When you adopt different trading strategies, greek options help you in making better informed decisions.
Implied Volatility Analysis: It helps you in identifying mispricing in the option markets and from which you can design newer strategies to encounter it.
Options Spread Analysis: It involves the examination of the prices of different options for the same underlying assets. From it, you will be able to identify opportunities for trading spreads like horizontal/Vertical/Diagonal spreads.
Option spread analysis will enable you in limiting the risk factors and improvise the profits in different market conditions.
Summarize:
I am hopeful that you could understand the outlines of the option chain analysis and path incorporated in the analytics.
However, in nutshell, by adopting the option trading analysis, you will be able to identify the trading opportunities, adopt better risk management, and gain a better understanding of the ongoing market behavior.
In the end, you will be able to enhance your trading potential in the stock market scenario.