How to Read Options Chain? - Explained with Example

The options chain (also called option matrix) is your primary tool for analyzing available contracts, assessing market sentiment, and selecting strikes. It displays all call and put options for a given underlying across various strikes and expiries, along with critical data like premiums, volume, open interest, implied volatility, and Greeks. Learning to read this information efficiently is essential for informed trading decisions.

Most trading platforms present option chains in a similar format: calls on the left or top, puts on the right or bottom, with strike prices in the center. The current trading price (spot price) of the underlying is typically highlighted, showing which options are ITM, ATM, or OTM.

Every column in an options chain provides specific actionable information. Understanding what each metric means and how to interpret it is the foundation of chain analysis.

Before analyzing any other data, always assess liquidity. Trading illiquid options is one of the most common and costly mistakes. Poor liquidity means wide spreads, difficult exits, and vulnerability to manipulation.

• Bid-ask spread percentage: Calculate (Ask-Bid)/Midpoint × 100. Acceptable spreads are <5% for active traders, <10% for position traders.
• Volume verification: Look for minimum 100+ contracts traded today for the strike you're considering.
• Open interest check: Prefer strikes with OI above 500 contracts; above 5,000 is excellent liquidity.
• Compare multiple strikes: ATM and near-ATM typically have best liquidity; far OTM often have poor liquidity.
• Time of day matters: Liquidity improves during first hour and last hour of trading; midday can be thin.
• Weekly vs monthly expiries: Weekly expiries often have good liquidity in ATM strikes but poor liquidity in OTM/ITM; monthly expiries generally have broader liquidity.

Open interest represents the total number of outstanding option contracts. Unlike volume (which resets daily), OI shows cumulative positioning and changes reveal where smart money is building or exiting positions.

• High call OI at a strike suggests resistance: Many participants have sold calls expecting price won't exceed that level.
• High put OI at a strike suggests support: Many participants have sold puts expecting price won't fall below that level.
• OI concentration: Strikes with unusually high OI compared to neighbors indicate psychological levels.
• OI changes: Rising OI with rising price suggests new bullish positions; rising OI with falling price suggests new bearish positions.
• Max pain theory: The strike with maximum OI (calls + puts) is often where price gravitates toward expiry—option writers profit most if price settles there.
• OI build vs unwinding: Compare today's OI to yesterday—large increases show fresh positions; decreases show position closing.

Implied volatility reflects the market's expectation of future price movement. High IV means expensive options (sellers' market); low IV means cheap options (buyers' market). IV analysis is crucial for strategy selection and timing.

• Compare current IV to historical IV: Is current IV in the 80th percentile historically? Options are expensive. In the 20th percentile? They're cheap.
• IV skew analysis: Compare IV across strikes. Higher IV in OTM puts (put skew) is common, reflecting crash protection demand.
• India VIX reference: Check India VIX level—when VIX is >25, option premiums are inflated across the board; when <15, premiums are compressed.
• Event IV spike: Before earnings, budget, elections, IV spikes 50-100%—buying options becomes unfavorable unless you expect even more volatility.
• IV rank usage: IV rank (current IV relative to 52-week high/low) helps determine if now is good time to buy (low rank) or sell (high rank) options.
• ATM IV as benchmark: Use ATM strike IV as the reference point for the entire chain.

Modern platforms display Greeks directly in the option chain. Understanding how to quickly assess Greeks helps you select strikes that match your risk tolerance and market view.

• Scan delta for directional exposure: 0.50 delta calls move ₹50 per ₹100 underlying move; 0.20 delta calls move only ₹20.
• Check theta for time decay cost: If your long call has theta of -₹8 per day, you need underlying to move favorably to overcome this burn.
• Verify gamma for risk assessment: High gamma (>0.05) in short positions near expiry is extremely risky.
• Compare vega across strikes: ATM options have highest vega—most sensitive to volatility changes.
• Use delta as probability estimate: A 0.30 delta option has roughly 30% probability of expiring ITM (simplified approximation).

Let's walk through analyzing an actual Nifty option chain systematically. Assume Nifty spot is at 18,450, and you're considering a bullish trade.

1. Pick expiry based on your time horizon: For a 5-7 day view, choose current week expiry; for 2-3 week view, choose next week or monthly expiry. Let's choose weekly expiry (5 days remaining).
2. Filter for liquid strikes: Look at 18,400, 18,450, 18,500, 18,550 calls. Check bid-ask spreads (<5%), volume (>1000), and OI (>5000). All pass liquidity test.
3. Assess moneyness and delta: 18,400 call (ITM, delta 0.65), 18,450 call (ATM, delta 0.52), 18,500 call (OTM, delta 0.40), 18,550 call (OTM, delta 0.28).
4. Check theta: 18,450 ATM call has theta of -₹12 per day. Over 5 days, you'll lose ₹60 to time decay if Nifty doesn't move.
5. Analyze IV: Current ATM IV is 16%, which is at 35th percentile historically—neither expensive nor cheap, neutral IV environment.
6. Look at OI patterns: Notice high OI at 18,500 strike (both calls and puts)—this may act as resistance/magnet.
7. Calculate breakeven: If buying 18,450 call at ₹180, breakeven is 18,630 (strike + premium). Need 180-point move (1%) to break even.
8. Review risk-reward: Maximum loss ₹180 (premium paid), potential profit if Nifty reaches 18,650 would be ₹200 per contract (52 lots = ₹10,400 profit for ₹9,360 risk).
9. Make decision: Given theta burn, tight timeframe, and resistance at 18,500, consider a bull call spread (buy 18,450, sell 18,550) to reduce cost and theta impact.

PCR is derived from option chain data and represents the ratio of put open interest to call open interest. It's often used as a contrary indicator of market sentiment.

• Trading based on LTP alone: LTP might be stale; always check bid-ask and timestamp.
• Ignoring liquidity: Wide spreads can turn winning trades into losses through execution costs.
• Misinterpreting OI as direction: High call OI doesn't mean bullish—could be covered calls or short calls (resistance).
• Buying cheap OTM options: Low absolute price doesn't mean good value; consider probability and theta decay.
• Not comparing IV across time: Today's 18% IV might be historically high or low—context matters.
• Overweighting max pain: Max pain is a tendency, not a guarantee; don't base entire strategy on it.
• Forgetting to check underlying chart: Option chain data should complement technical/fundamental analysis, not replace it.

• Volatility smile plotting: Graph IV across strikes to identify relatively expensive or cheap options.
• OI change tracking: Monitor strikes where OI is building rapidly—institutional positioning clues.
• Volume vs OI ratio: High volume relative to OI suggests short-term trading; low volume with high OI suggests longer-term positioning.
• Cross-expiry analysis: Compare IV and OI across different expiries to identify calendar spread opportunities.
• Strike clustering: Identify strikes with significant OI clusters—these often become support/resistance zones.
• Time series analysis: Track how OI, IV, and premiums change over multiple days to identify trends.

Option chain data is descriptive of current market positioning, not predictive of future price movement. Always combine chain analysis with technical price action, fundamental catalysts, and disciplined risk management rules. The chain tells you what participants are doing; you must still decide if their positioning creates opportunity or confirms your view. Mastering option chain reading takes practice—spend time reviewing chains daily, even when not trading, to build pattern recognition and intuition.