What is the Nifty Option Chain Analysis

 

If you have had the pleasure of visiting the NSE website and going to the Nifty screen, you must have seen a link that suggested something like “option chain” at the top. Now you must know that you can also access the option chain on your own terminal, but the one that is available on Nifty website is made available for everyone in real time. Now to address the elephant in the room: What does Option Chain mean?

The meaning of option chain

An option chain is the representation of all the option strikes of the Nifty in one frame. Keep in mind that just like you have an option chain for Nifty, you also have different option chains for all the different key indices traded in F&O. Also, for the stocks where option trading is permitted, you’ll find the option chains for them as well. But in order for the option chain to be relevant the stock has to be relatively liquid.

How do the traders perform the option chain analysis?

The Option chain data that is made available on the Nifty website has great utility, given the fact that it’s among the most liquid contracts, and weekly options are also available on the same.

Nifty option chain is so useful because it gives a broad idea of in-the-money and out-of-the money options. On the chart, the strikes which are marked by yellow are in-the-money or ITM options and those that are unmarked, are out-of-money of OTM options. This marking however is not constant and keeps changing with the fluctuations in Nifty.

The trader can utilize the option chain while doing intraday trading to evaluate the liquidity as well as the depth of each strike. Nifty option chain is believed to be the most successful advance warning system of sharp moves or break outs in the index. If you want to see for yourself then you can test this claim empirically. You’ll notice that all the major moves in the Nifty are always preceded by the predictive trends in OI and volume shifts. This is extremely beneficial for the traders as they can use these shifts in price with proper support of volumes as a pointer to help themselves position their trades.

Option chain is especially beneficial with regards to deep OTM options, where the action is usually quite subdued. A sudden spike in the action in deep OTM calls and puts indicatives a probable break out in that direction.

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