An option chain can seem very complicated the first time you view it. There are Call OI, Put OI, change in OI, volume, IV, LTP, strike price, bid, ask and many other figures moving as the markets move. It is very easy for an amateur investor to just look at one figure and jump to the conclusion that the market is moving in a certain way. However, an option chain becomes more effective only when one knows how each component relates to each other.

The following are some of the mistakes that amateurs commit while viewing an option chain.

1. Taking into Account Open Interest by Itself

Open interest (OI) is the quantity of option contracts which have been opened, but haven’t been closed yet, exercised or expired. The beginner usually sees high Call OI on some level and makes a conclusion: “It’s resistance”. In the same way, high Put OI means: “It’s support”. Though OI could give you useful information, it cannot be considered as the only one. High OI means that there are a lot of contracts open on that strike level. However, it doesn’t mean anything about the reasons of that and what is going to happen next. You should take into account price, OI change, volume, underlying price and overall market situation in addition.

2. Mixing Up Open Interest and Volume

It is one of the most fundamental mistakes. Volume shows you how many contracts were traded during certain period of time and OI shows you how many open contracts are on that level. For instance, some stock options could have high volume during the day but don’t end up with the same big OI increase. It is very important to understand the difference between them, because they mean absolutely different things.

3. Mistakenly Believing in Automatic Support of High Put OI

It is very tempting when you observe high Put OI at some specific strike price to believe in its role as support. But options positioning is quite fast-changing process. Traders can open new positions, liquidate them or re-position themselves. So, high Put OI should be treated as just a single indicator and not as an absolute support level. The same rule holds true in case of Call OI and resistance.

4. Considering High Call OI as Automatic Bearish Sign

Yet another typical assumption: high Call OI means bearish market sentiment. It is too naive. The interpretation of any options position depends on whether option contract is long or short, among other things. Call options, for instance, can be used for various purposes, such as hedging or spread formation. The sheer number of contracts does not tell you anything about the whole position.

5. Ignoring Change in Open Interest

Only examining the total OI would be overlooking how things stand for the current trading session. The change in OI would bring in more insight into what is going on in terms of changes in open positions. If the change in OI is rising sharply at a certain strike price, it means that there are positions that are being accumulated. In case the OI is falling, it could mean that positions are either closing down or reducing. Change in OI still requires to be looked at together with the price and other data since it should not be assumed to be bullish or bearish blindly.

6. Ignoring the Underlying Price

The option chain is not supposed to be viewed independently from the underlying security. When looking at an index option chain, it is first of all necessary to know how the index itself is behaving. For instance:

• Is the index trending?
• Is the index moving sideways?
• Is the volatility rising?
• Are important price levels around?
• Has there been an important market event recently?

The option chain provides derivatives-market information, while the underlying price provides the context in which those positions exist.

7. Concentrating on the Near Strike Prices

The beginners have the tendency of considering only those strike prices which lie near the market price while neglecting others. But there are chances that other strikes might also provide helpful information. In this regard, analyzing more strikes above and below the market price will give you an idea about the distribution of the open interest, volume and premiums of the option chain. Instead of analyzing only near strike prices, one could analyze:

ATM → One/two strikes above → One/two strikes below

8. Ignoring Implied Volatility

There is much more than just a directional movement affecting the price of an option. The implied volatility (IV) is another important component affecting the price of the option. An increase in the IV will lead to higher premiums while a decrease in the IV will result in lower premiums, ceteris paribus. As a result, there are possibilities that an option premium will fail to behave the way a beginner expects when its underlying moves in the right direction.

9. The Time Value of Options

Option contracts have an expiration date. As the expiration nears, the amount of time left to make a profit from that option becomes shorter. This factor is known as the time value, which can be measured through the Greek symbol theta. Novices often believe that there will always be value in their option, provided the underlying doesn’t turn against them too much. An option’s value can fall due to time itself.

10. Analyzing the Option Chain Without Considering Liquidity

All options aren’t created equal in terms of liquidity. Before trading an option, consider:

• Trading volume
• Open interest
• Bid-ask spread
• Market depth

A contract with lower liquidity could have a greater spread between the bid and ask prices and that makes trading either way less effective. So do not consider any options solely based on the fact that their premiums are cheap.

11. Relying On the Option Chain’s Ability To Predict the Market

The most critical mistake here would be to treat the option chain like a crystal ball. You can observe OI at certain strikes and believe that the market would go in a certain way. But the option positioning can change, unexpected news could affect the underlying, volatility can change, traders can re-position and/or close out positions. An option chain should be regarded as a tool to get market information, but not the predictor of future events.

12. Attempting To Interpret Everything Simultaneously

The option chain provides many pieces of information. Analyzing all columns at once could complicate your analysis process. A beginner trader could focus on a smaller amount of information in the beginning:

Underlying price → Strike price → Call/Put premium → OI → Change in OI → Volume → IV

When all of these terms become familiar, other data could be used as well, depending on the strategy.

An Easy Approach to an Options Chain

Rather than looking for a signal right from the beginning, take a systematic approach. The first step is to know the price of the underlying. Find out what the ATM strike price is and then look at a few strikes both above and below that. Check:

• Call and Put premiums
• Open interest
• Change in OI
• Volume
• Implied volatility
• Bid-ask spreads

Then move on to see how the market looks as well as your time horizon. Next comes the bigger picture and your trading time frame. Such an approach may help you not base your decision on just one number alone.

The Use of Option Chain in Trading

The option chain may be a helpful tool in analyzing the derivatives market; however, such an approach should be combined with other types of analysis. For instance, you may have to take into account:

• Price trends
• Market structure
• Volatility
• News and events
• Technical indicators
• Your trading strategy
• Risk and position size

High OI in the puts below the strike level may seem interesting to you, but this does not necessarily mean that the underlying asset will trade above this level. The option chain gives you insight into the dynamics of option contracts. It’s up to you to understand the background of these numbers.

Look Beyond the Chain, Don’t Only React To It

While an option chain may seem overwhelming, beginners do not have to know all numbers at once. The crucial aspect lies in not making assumptions. A high OI does not necessarily mean support or resistance. OI change does not always imply either a bullish or bearish trend. A falling option premium does not always suggest that you have misread the market. Through understanding OI, volume, IV, time decay and the underlying price together, an option chain can be understood better and avoid some mistakes that may arise through using just one indicator. The idea is not about predicting all market movements, but making your analysis more organized by using available information.

Looking for a convenient way to analyse option-chain data? Explore Aetram for tools that bring key options data together in one platform.

FAQs

1. What is the biggest mistake beginners make when reading an option chain?
One common mistake is relying on a single metric, such as open interest, to predict market direction without considering price, volume, IV and the broader market context.

2. Is high Call OI always bearish?
No. Call options can be used for different strategies, including hedging and spreads. High Call OI alone does not establish market direction.

3. What is the difference between OI and volume?
Volume measures contracts traded during a period, while open interest represents contracts that remain open.

4. Why is implied volatility important in an option chain?
IV reflects the market’s expectations about future price variability and is an important factor influencing option premiums. Changes in IV can affect option prices even when the underlying doesn’t move significantly.

5. Should beginners use the option chain to predict market direction?
The option chain can provide useful information about derivatives positioning but it shouldn’t be treated as a guaranteed predictor. It is better used alongside the underlying price, market conditions, strategy and risk management.