How to place a trade using option chain
A chart that gives detailed information about all the stock option contracts that are on offer for stocks of the Nifty is known as an option chain. Its most convenient feature is the ability to provide insights into the existing security value and what it is likely to be in the long run.
An option chain is a detailed chart displaying available stock option contracts for Nifty stocks. For newcomers in options trading, this chart might appear intricate. Investors aim to understand and interpret it to make informed decisions. Notably, it offers insights into present and future security values. Feeling overwhelmed? This blog will simplify the concept.
Decoding the options chain
The options chain (also known as the options matrix), with its sections (call and put), is the listing of all option contracts. A contract that gives the right, but not obligation to sell an underlying asset at a predetermined price before the expiration date is a “call” option. A “put” option is the opposite.
The price at which the trader exercises the right to buy the stock is called an option strike. But for investors who are just dipping their toes, things needn’t be so complicated. The chart details things such as “ask,” “last price,” “bid,” and “net change” (in their respective columns), which can help traders make informed investment decisions.
Deciphering the terms
Being able to read the options chart easily requires the understanding of the following terms:
- Strike price: The price at which the buyer and the seller agree on the execution of a contract is known as the strike price. The trading of the option is profitable when the price of the option goes above the strike price.
- Open interest: The total number of unsettled outstanding derivatives are termed open interest. There must be a seller for each buyer of a futures contract.
- Volume: The total number of contracts of an option that is traded at a specified price is known as volume. The volume is an indicator of investors’ interest in the contract.
- Bid quantity: For a particular strike price, the bid quantity is the total number of buy orders. It is an indicator of the existing demand for an option at a given strike price.
- Bid price: This is the value quoted for the last buy order.
- Last traded option (LTP): The last trade price of an option is known as the last traded option.
- Ask price: For the last sell order, the price that is quoted is the ask price.
- Ask quantity: For a particular strike price, the total number of open sell orders is the ask quantity, indicating the availability of options.
These indicators (given in their respective columns) paint a picture of the mood for the options, the prices, availability, and general market sentiment. As the prices of the underlying stocks change, the strike price may also change. Options, like stocks, are like auctions that take place online. The buyer and the seller negotiate and then agree upon the conditions based on their understanding of how the markets are. A major factor that affects bids and strike prices is the time remaining for the expiration date. The premium (the price of an options contract) will diminish as the date of expiration nears.
To taste success at the options market, investors – especially the beginners – can use dedicated options services for faster, better results. Upstox can help you in your endeavours with the Option Chain solution.
Doing it right with Upstox
To get access to Upstox’s Option Chain and place an order, here are the steps that need to be followed:
- Sign in to your account on Upstox.
- Choose an index or stock (BANK NIFTY, FINNIFT, or NIFTY).
- Go to the top of the screen and then click on “option chain.”
- After that, swiping shows the call and put sides’ inputs as a mirror image.
- If the sequence or information isn’t to your liking, it can be customised by accessing it from the “settings.”
- The data points can be rearranged in the sequence of preference. Clicking “save” lets the changes reflect.
- To execute an order, select a strike price, pick strategy from readymade option strategies, or select a good-till-triggered (GTT) order.
- After clicking either call or put, the buy and sell buttons are visible. Selecting either brings up the screen for order entry.
- The mandatory values such as price and quantity need to be input in the order entry screen.
- Placing orders in excess of the freeze quantity is also possible, which means that they will be automatically “sliced” into many smaller orders.
- To view the order summary, tap/click on “review buy order” or “review sell order.” This will not be necessary if the order summary option is disabled. Simply swiping/clicking will execute your order.
- Click on “submit order” on the order summary to execute your order.
To get clarity about charges and taxes, the summary has a section that details them.
For a swifter order placing sequence, you can opt for the “don’t show this review screen” checkbox so that you can directly place orders on the order entry screen.
To be able to come out on the winning side, it is integral to know how to read and interpret the options chain. Better investment decisions and a dynamic outlook of the market are the outcomes of being able to decipher and break down the options matrix. A swift and concise image of the in-the-money and out-of-the-money options indicates how you should prepare to take on buyers and sellers at the negotiating table. With a keen eye on the strike price and how other factors are interacting, determining profitability (or otherwise) should be an easy task.