Option Chain Analysis; a bird’s eye view of today’s action

Shubham Agarwal

Option Chain, a simple tabular form that shows all the Call & Put options available for trading for a particular symbol and a particular expiry date. This piece of information is made available primarily to help us choose from many options that one or few options that we want to trade.

However, over a period of time all of us have started using the trade data so much so that now same option chain can help us find what the traders are expecting out of the underlying stock or index. This information to some is enough to trade on. Let us see what sort of information we see and how would they help us in understanding the view.

Picture above shows NSE’s option chain. This format is more or less standard across the globe. Some analytics platforms may have more information, but structure still remains the same.

Along with other information just concentrating on 3 combinations of Call & Put price change can help us understand a lot about today’s action.

1. Opposite Price action

We all know Call and Put Options are opposite in terms of their view. So, they behave also in opposite directions. Simple combination will let us know the direction of the underlying.

Call prices Up + Put Prices Down = Underlying is meaningfully Up for Today

Put Prices Up + Call Prices Down = Underling is meaningfully Down Today

One might say this can be found out by looking at the stock’s future also. Yes, it can be found. However, the price of options is also affected by the passage of time. The sheer change in price of Up in Call means that there is enough upward price action that has overtaken the impact of fall in premium due to passage of time. Hence, it is meaningfully up or down.

Two more combinations of the Call & Put prices can present themselves and they mean following.

2. Call Price Up + Put Price Up = Getting Ready of Big Move (on either side).

Both Call and Put Price can be up not just due to price but also due to expected volatility. The sellers of options demand higher prices in such situations. This is to cover themselves in case a of a big move due to an unforeseen outcome from a known event.

Best Example is Results for stocks, Monetary policy for Banks etc. Option Chain analysis tells you of any such event beforehand just by checking prices.

This helps us in identifying the possible unreliability of trend due to the upcoming event and one should avoid taking aggressive single direction trades.

3. Call Price Down + Put Price Down = An Event is Over without much Price action

This combination of Call & Put prices can tell us that there is expectation of a low volatility period. Typically, after announcement of “In line with expectation” result, the options do go thru such price reduction.

This helps us in building expectation that it may not be wise to buy options now due to low expectation of movement.