Understanding option chain – An essential of stock markets
Options in the share market have a language of their own which may be a bit of difficulty while understanding as a newbie. It just shoes rows and columns when you see the options chart for the first time, but understanding the options chart will give you valuable information to become a seasoned trader. Let’s know-how options chain are useful for trading.
Options chain help in a great way to make profits or losses in the market as this is presented in a real-time with consistency throughout. Although all stocks do not have options chain, some do have and understanding this would help in a great way to invest in a particular share.
What To Understand About Option Chain?
Options chain have two options that are listed below, put option and the call option. The put option is for selling 100 shares at a particular price at a particular time while the call option is to buy 100 shares at a particular price at a particular time.
It should be noted that one gets the right to either sell or buy the share but is not an obligation.
These options have different expiry dates and with options having expiry dates in less than 30 days will lose its value quickly because of lesser execution time.
Fundamentals About Option Chain
Strike price- This is the price at which you buy a share at call or sell a share at put. Shares with higher strike price are cheaper at call options rather than the ones that have strike price. For put options, it’s just the reverse. Low strike price indicates higher call options.
Market Price- For the options to be worth, it is necessary that market price should be above the strike price. For example, if the cost of a share is Rs. 30 and the share is bought at call option Rs. 45, the market price needs to be above Rs. 45.
Symbols– Like any underlying stocks every option contract has a specific symbol. Different expiry dates of the same stock with options contracts have different symbols.
What does the chart indicate?
The change columns show the variation between the most recent trade price to the last day’s closing price.
Bid and ask columns show the prices at which the buyers and sellers would be willing to trade. Negotiation takes places between the buyers and the sellers. Only when the price at which the buyer is willing to pay, and the price at which the seller is willing to sell becomes equal, the transaction takes place.
The volume column indicates the total options traded on that particular day, while the open interest column shows the options that are outstanding.
What is in the money option or out the money option–
In the money option– This means that the market price is above the strike price, and the option has an intrinsic value. This shows guaranteed profits, so immediately one can buy a call option and sell it with a profit.
Out the money option- Here the strike price is still lesser than the market price. If the market price doesn’t move as expected the option becomes worthless and expires.
Understanding options chain is always beneficial as it helps in making better decisions and also be on the winning side.