All about Options

What is an option chain?


An option chain is a matrix listing for a single underlying asset showing all puts, calls, strike prices, and pricing information for a given maturity period.


The last price column displays the latest trade price captured and reported. 


Information in the net change column reflects the direction (up, down, or flat) for the underlying asset, as well as the amount of price variance from the previous trade. 


Review of the bid column shows information about how much a trader could expect to receive on the sale of that option at that time frame. 


Information about how much the trader can expect to pay to purchase that option at that time appears in the Ask column.


Trading volume, or the number of contracts that change hands in a given day, indicates how much liquidity there might be for any given option. Open Interest measures the total number of options outstanding on each strike and maturity, allowing you to gauge the scale of market commitment.


What is open interest?


Open interest is simply the total number of outstanding derivative contracts, that have not been settled. If a buyer and seller come together and initiate a new position of one contract, then open interest will increase by one contract. If a buyer and seller both exit a one contract position on a trade, then open interest decreases by one contract. If a buyer or seller passes off their current position to a new buyer or seller, then open interest remains unchanged.


A common misconception of open interest lies in its purported predictive ability. It cannot forecast price action. High or low open interest reflects investor interest but it does not mean that their views are correct.


Keep in mind that the real level of open interest varies intraday. Market makers report the information shown in the option chain only at the end of each trading day. The option chain matrix is most useful for the next trading day.


Now that we have read the basics of option chain and open interest with volume. Let's see how to correlate them in various conditions and what do they suggest.


How to use open interest along with option chain and it's importance ?


Open interest is a measure of the flow of money into a futures or options market. Increasing open interest represents new or additional money coming into the market, while decreasing open interest indicates money flowing out of the market. 


Rising open interest represents additional money and interest coming into a market, it is generally interpreted to be an indication that the existing market trend is gaining momentum and/or is likely to continue. The same concept applies to downtrends; if the price is declining and open interest is increasing, open interest favors further price declines.




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