How to Read Options Trading Charts?

Options trading can appear too complex. However, you will make the best choice with the right tool. An options trading chart is the most valuable tool for traders. What is an options trading chart? How is it used? Why is it crucial to traders from India? We will do our best to break it down and make it easy for you to start using these charts in your trading career.

What Are Options?

So, let's know what options are before we head into options trading charts.

Options are financial contracts giving the buyer the right-but not the obligation-to buy or sell an underlying asset at a predetermined price before a specific date. Options in India are traded extensively on the NSE and BSE.

There are two types of options:

Call Option: This will give the buyer of the option the right to buy the underlying asset.

Put Option: This will give the buyer of the option the right to sell the underlying asset.

Options Trading Charts to Understanding Things Better!

An options trading chart lets you view the direction in which the price of an option is moving overtime. It gives you a chance to see how the price of the option changes based on market conditions. Charts can be used to spot trends, patterns, and entry and exit points.

Why do charts matter in options trading?

Charts simplify the data and give you a visual presentation of the movement in price, which makes it easier to have quicker, more educated decisions. For example, you can use the chart to know at which specific level an option's price is hitting a resistance or support level, which might guide your strategy to buy or sell an option.

It helps with Technical Analysis:

Charts will enable you to conduct technical analysis, which is basically the study of past price movements to determine possible future trends.

Finds Trends:

By taking a look at the patterns on the chart, you are able to know if the price is increasing or decreasing or if it just remains sideways.

Illustrates Volatility:

Volatility is a crucial factor in determining the options pricing. Charts will enable you to see how volatile the option is in helping to calculate the risk.

Major Components of an Options Trading Chart

A chart for options trading contains quite a number of elements that help to fully equip the investor with useful information regarding the option prices and their behavior.

1. Price Movement

It is the most basic element of the chart. It describes the changes in the price of an option over a certain period of time. The X-axis usually represents time, and the Y-axis represents price.

2. Candlestick Patterns

Candlesticks are the most popular manner of presenting price in an options trade. Each bar represents the price action over an interval of time. What the body of the candle indicates is that this is opening and closing price and wicks are the highest and lowest price over the same interval.

• Green Candles: Price closed higher than it opened.
• Red Candles: Price closed lower than it opened.

More patterns or evidence are furnished by candlestick patterns, especially in the identification of whether they are either reversal or continuation patterns, where possible buy and sell signals will be generated for the best time to enter or leave a trade.

3. Support and Resistance Levels

Support is the level of price at which the option finds some buying interest, and resistance is the point of selling. These levels show traders when to buy or sell an option.

For instance, particular option hitting support level, bounces. Now it is the right time to purchase. In case an option hits a resistance level and begins to fall it will be the right time to sell.

4. Moving Averages

A moving average is a line that smoothes out the price data by creating constantly updated average price. In options trading, there are several types of moving averages most commonly used, which are 50 days and 200 days moving averages.

• Application of 50-day Moving Average : It is used in the identification of short-term trends.
• Application of 200 days Moving Average: This moving average is used as a tracker to know about long term trends.

These lines are more important to help the traders understand the overall direction of the market and thus it also helps in a good entry and exit of an option trade.

5. Volume Indicators

Volume is the number of contracts traded over a given period of time. High volume typically indicates strong interest in the option and may result in more extreme price movements; low volume might indicate that the market isn't particularly active.

6. Implied Volatility (IV)

Implied volatility is the measure of the market's expectation of how volatile the price of the option will be going forward. This is one of the most important factors in options trading because it affects the premium or the price of the option. The higher the volatility, the higher the premium.

Tools to Use with Options Trading Charts India

There are numerous online providers in India that allow the fabulous-looking charts for options trading. Here are a few popular ones:

• Zerodha: A leading India-based share trading company, supporting a robust charting software with its web-based trading platform known as Kite.
• Upstox: Another popular platform for its customizable charts and technical indicators besides options trading.
• Angel Broking: Their user-friendly interface features an all-inclusive charting system and other tools to aid in research.
• ICICI Direct: Best suited especially when it comes to having some highly sophisticated charting options for beginners and professional traders alike.

Strategies You Can Apply Using Options Trading Charts

Once you get a hold of the basics of the graph of an options trading chart, you are ready to start applying some strategies to enhance your trade. Here are a few commonly used by Indian traders:

1. Trend Following

Identify a trend on the chart - uptrend or downtrend then make the trade in the same direction. Buy call in case of an uptrend and put for a downtrend.

2. Breakout Trading

A breakout is defined as the time when the price moves past a strong level of support or resistance. Trades most often purchase call options when the price breaks above resistance or buy put options when the price drops below support.

3. Range Trading

If the price of an option is horizontal, ranging between support and resistance, one could buy at the support level and sell at the resistance level.

Risks to Be Aware Of

Options trading is very rewarding but risky. The options are more complex than the common stock trading, and the value can go very high or drop very drastically. Another thing that makes the profits relatively low is time decay, as the value of the option has to decline when it is about to expire.

Thus, these risks must be well known and managed with some risk management tools, for instance, stop-loss orders, in order to control the probable losses.

Conclusion

Options trading charts are great sources of information which can reveal a lot about price movements, trends, and opportunities. Therefore, for an Indian trader, the acquiring knowledge of how to analyze them is of paramount importance for decisions along with further facilitating more successful trades.

First, get on to a simple platform, practice chart analysis, and accordingly polish your strategy with time. Done with the right strategy, options trading can indeed be an important part of your financial journey.

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