Options are popular derivative instruments among Indian traders, especially on indices like Nifty and Bank Nifty. This tutorial explains the basic types of options and how to read an option chain to make informed trading decisions.
What Is an Option?
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or index) at a fixed price before or on a specific date. The seller (writer) of the option is obligated to fulfil the contract if the buyer exercises it.
Types of Options
There are two basic types of options:
| Type | Meaning | Buyer’s Right |
| Call Option | Gives the right to buy the asset | Profits when price rises |
| Put Option | Gives the right to sell the asset | Profits when price falls |
Based on Moneyness
Options are also classified based on the relationship between the strike price and the current market price:
- In the Money (ITM): Has intrinsic value if exercised now
- At the Money (ATM): Strike price is equal (or very close) to the current market price
- Out of the Money (OTM): Has no intrinsic value; only time value
Based on Style
- European Options: Can be exercised only on the expiry date (used for Indian index options)
- American Options: Can be exercised any time before expiry (used for Indian stock options)
Key Option Terms to Know
| Term | Meaning |
| Strike Price | Fixed price at which the asset can be bought/sold |
| Premium | Price paid by the buyer to the seller |
| Expiry Date | Date on which the contract ends |
| Lot Size | Minimum quantity that can be traded |
| Open Interest (OI) | Total number of outstanding contracts |
What Is an Option Chain?
An option chain is a table that lists all available call and put options for a particular stock or index, across different strike prices and expiry dates, at one place. It helps traders compare prices, activity, and sentiment across strikes instantly.
How to Read an Option Chain
A typical option chain is divided into two halves — Calls on the left and Puts on the right — with strike prices in the middle.
| Column | What It Shows |
| OI (Open Interest) | Number of active contracts at that strike |
| Change in OI | Rise or fall in OI compared to the previous session |
| Volume | Number of contracts traded during the day |
| IV (Implied Volatility) | Market’s expectation of future price swings |
| LTP (Last Traded Price) | Most recent premium paid for that option |
| Bid/Ask Price | Buyer’s and seller’s quoted prices |
Why Option Chain Analysis Matters
Option chain analysis helps traders gauge market sentiment before taking a position. Here’s what to look for:
- High Call OI at a strike often signals a resistance level
- High Put OI at a strike often signals a support level
- Rising IV suggests increasing uncertainty or expected volatility
- PCR (Put-Call Ratio), calculated by dividing total put OI by total call OI, indicates overall market mood — a PCR above 1 is generally considered bullish, while below 1 is considered bearish
Quick Tips for Beginners
- Always check OI along with price movement, not price alone
- Focus on ATM and near-ATM strikes for the most reliable signals
- Compare current data with the previous day’s chain to spot fresh build-ups
- Avoid deep OTM options with very low OI, as they can be hard to exit
Conclusion
Understanding the types of options — calls, puts, and their moneyness — lays the foundation for reading market data correctly. When used in combination with regular option chain analysis, this knowledge helps traders identify support and resistance levels and gauge sentiment. This also aids in making more informed entry and exit decisions in the derivatives market.
