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Understanding Option Chain

Overview of the Option Chain​

Option Chain may be defined as a list of all option contracts. It covers both calls and puts of a certain security.

Skilled users can utilize the AlgoTest Option Chain to determine the direction of price fluctuations. It also aids in identifying the instances at which a high or low amount of liquidity arises. Typically, it allows traders to assess the depth and liquidity of individual strikes.

It displays all available calls and puts options contracts for a particular underlying security on an exchange. Each contract represents the right, but not the obligation, to buy or sell the underlying security at a specific price (strike price) by a specific date (expiration date).

The option chain organizes this information in a way that's easy to understand. Here are some key elements you'll typically find:

Strike Prices​

A range of prices at which you can buy or sell the underlying security.

Call Contracts​

A call is an option contract that grants the owner the right, but not an obligation, to buy underlying securities at a certain price within a given timeframe.

Put Contracts​

Put options offer the option holder the right, but not the responsibility, to sell an underlying security at a given price within a given timeframe.

Expiration Dates​

The date by which you must exercise your option to buy or sell. An option's expiration is the specific date and time when the option contract becomes invalid.

Option Greeks:​

The Greeks are letters that represent important measurements of an options contract. They help assess how the price of an options contract may be affected by

  • changes in the underlying security's price (Delta),
  • volatility (Vega),
  • rate of change of the option's delta(Gamma),
  • and time decay (Theta).

Understanding the Greeks can help you make better decisions about which options to trade and when to trade them.

On AlgoTest, call and put options with the same underlying, strike price and expiry show the same Gamma, Vega and Theta. Among the four Greeks discussed here, Delta differs. See why.

Implied Volatility (IV)​

IV is an annualised estimate of the underlying’s volatility, meaning it is expressed as a yearly percentage. It is calculated from an option’s market price using a pricing model and is also an input in calculating option Greeks. AlgoTest displays one IV for each strike and expiry, taken from the out-of-the-money (OTM) option at that strike.

Bid-Ask Spread​

The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an option contract.

By analyzing the option chain, you can gain valuable insights into market sentiment, potential price movements, and the cost of different options strategies.

Why Are Call and Put Greeks the Same on AlgoTest?​

For the same underlying, strike price and expiry, AlgoTest shows identical Gamma, Vega and Theta for call and put options. These matching values follow from the inputs and assumptions used in our calculations.

  • Gamma and Vega: Their respective Black-Scholes formulas are the same for calls and puts. Using matching inputs, including the same IV, produces identical values for call and put options.

  • Theta: Call and put Theta can differ because of interest-rate and dividend-yield assumptions, even with the same IV. AlgoTest sets both inputs to zero, so Theta also matches.

Why Is There Only One IV for Each Strike?​

AlgoTest displays the OTM side’s IV (OTM options trade more actively, with tighter bid-ask spreads and a more reliable LTP-derived IV) and hides the unreliable ITM-side IV.

Why this happens: the stale, illiquid ITM leg produces a garbage IV, which then contaminates every Greek computed from it (Gamma, Vega, and, to a lesser extent, Theta’s shared term). We compute the Greeks for both legs using one reliable IV per strike — typically the OTM side’s IV — instead of trusting each leg’s own independently derived IV.

Why Do Other Platforms Show Different Greeks?​

Platforms that calculate IV separately for calls and puts may use different volatility inputs for the two options. This can produce different Greek values.

Differences can also arise from the pricing model, underlying reference price, interest-rate and dividend assumptions, or how time to expiry is measured.

To check the relationship yourself, open the AlgoTest Black-Scholes tool. Use matching inputs for both options, including the same IV, and set both the interest rate and dividend yield to zero. Gamma, Vega and Theta will match.