In the above Nifty option chain frame extracted from the NSE website, the strike price is at the centre and all data pertaining to calls are on the left and all data pertaining to puts are on the right side. One of the key advantages of this option chain is that it gives you all important data points of calls and puts of a single strike in a single reading. Such data points include, price change, volume change, IV change, open interest change, accumulation, unwinding, etc. For any trader, this is a quick reference check to see where there is accumulation build up and here there is OI reduction. In the Nifty Option chain, all the in-the-money (ITM) strikes are shaded in yellow and this keeps changing with the change in the market price of the Nifty options and the spot value of the Nifty.
How traders can interpret the Nifty Options chain data?
The Option chain data of the Nifty is specifically useful considering that it is one of the most liquid contracts and weekly options are also available on the same. Here are some of the key takeaways from the Nifty options chain represented above.
- Nifty option chain gives a quick picture of in-the-money and out-of-the money options. While the strikes shaded in yellow are the ITM options, the un-shaded strikes are the OTM options. This rule applies to calls and to puts. This shading keeps changing as the spot value of the Nifty changes.
- The option chain helps the trader to evaluate the liquidity and depth of each specific strike. Option chain is not just about the executed price of the option contract but also captures bid and ask price and quantity which gives a better picture of the actual depth of the option. This is more useful when traders are looking at OTM options where liquidity is generally lower.
- Nifty option chain is considered to be the best advance warning system of sharp moves or break outs in the index. You can test this empirically and you will find that any major move in the Nifty was preceded by clear anticipatory trends in OI and volume shifts. That is because, institutional investors like FIIs and mutual funds tend to be more active in index options. Traders can use such abrupt shifts in price / IV with adequate support of volumes as a useful pointer to position their trades.
- Option chain is specifically useful in case of deep OTM options where action is normally quite tepid. A sudden spurt in action in deep OTM calls and puts is indicative of a break out in that direction.
- Fundamental and technical analysts also use the option chain data as an important data point for ratification of their view. For example, if an analyst identifies a game changing trigger for a stock and if that is ratified by accumulation in deep OTM calls, then it gives that extra confidence to the analyst. Even for chartists, option chain data trends can be an additional evidence to be considered.
Nifty option chain is just a representation. You can use this logic for other indices and specific liquid stocks too.