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How to Use Option Chain for Day Trading?

    To excel at options trading online, you need to be familiar with the rows of fleeting numbers in options charts. What do these numbers mean, and how can you use them to gain profits? In this blog, we will discuss just this!

    Option Chain for Day Trading

    What Data Does an Options Chain Provide?

    We have curated a list of components that can be read from the options chain chart below.

    → 1. Strike Price

    The price at which both parties agree to execute the contracts is the strike price. 

     2. Premium

    The price that a buyer of a call option and the seller of a put option pays to its counterpart to compensate for taking the risk.

     3. Calls and Puts

    The calls option allows you to buy a certain number of shares at a specific price within a fixed duration, while the puts option gives you the right to sell your shares at a particular price within a given period.

     4. Expiry Date

    When using your options trading app, you will notice that the expiry date of options is listed. When an option’s expiry date is near, it starts losing its value rapidly. 

     5. Ask Price & Quantity

    The ask price is the price quoted in the latest sell order, while the ask quantity is the number of open sell orders at a given strike price. 

     6. Bid Price & Quantity

    The Bid price is the price quoted in the latest buy order, and the bid quantity is the number of open buy orders booked at a given strike price. 

     7. In, At, and Out-of-the-Money Options (ITM, ATM, and OTM)

    ITM defines a scenario where the option’s strike price is more than the current market price, and hence there is a positive cash flow. 

    The OTM defines the exact opposite situation wherein if the options are exercised immediately, there will be a negative cash flow. 

    ATM refers to a zero cash flow which means there is no net profit or loss.

     8. Open Interest(OI)

    This indicates open orders in the market.  

     9. European and American Options

    When an option is a European option, you only can exercise it at the predetermined date and time, while an American option allows you to exercise this option at any date before the expiry.

    How to Use Option Chain Charts?

    With the knowledge of the different components of an options chart, you can now start reading this data on your options trading app. 

    Based on the bid-ask spread and volumes, you can estimate the most favored prices at which traders are willing to buy and sell options and the magnitudes. Additionally, you can use the open interest to check out how many options contracts are yet to be exercised because this also helps you get a better picture of the options market. 

    For options trading online, you also need to keep a close eye on the volatility because it has much to say about whether your options trade would be profitable or loss-making. 

    For example, consider an option with its current price far from the strike price. In this scenario, the chances of making a profitable transaction are slim if the volatility is low. Think about all the aspects and learn and practice them on a simulator before indulging in options trading.

    Final Words

    Options trading online becomes easier if you are aware of how to use the data to your advantage because it helps you gauge which trading decision would be effective at any given point. If you are unsure, you always have the option of running trading simulations until you gain confidence.

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