How to Use Options Charts

In this article, we will discuss

• What are Options Charts?
• Types of Options Trading Charts
• Tips to Use Options Trading Charts Effectively
• Conclusion

Options trading can be challenging for beginners. However, what sets successful traders apart from those who endure losses is the right set of trading tools and platforms. Among these trading tools are options charts, which can be pivotal to trading in the options market. Unlike stock trading charts, which only track prices and trading volumes, options trading charts need to factor in the many facets of the options market — like prices, implied volatility, trading volume, options Greeks and more.

Samco Securities has all of these different aspects covered in the suite of advanced features integrated into the Samco trading app. From detailed options chains and IV charts to up-to-date options Greeks data and an advanced options strategy builder, Options B.R.O, Samco’s trading app has everything covered.

All these tools, however, mean little if you do not know how to read and interpret options trading charts and graphs. So, in this article, we delve into the essential subject of what these charts are and how you can use them to your advantage in options trading.

What are Options Charts?

Options trading charts are visual representations of options data and pricing information over a given time frame. They display various aspects of options contracts like the strike price, expiration date, implied volatility and more. These trading charts can also show the price movements of specific options contracts, so you can analyse trends and patterns in options pricing more easily.

Depending on the type of options trading charts you use, you may also find additional information like volume, open interest, options Greeks (like delta, gamma, theta and vega) and other crucial data points. Together, these insights can give you a comprehensive view of market sentiment and trader behaviour.

Some options graphs and charts also incorporate information about the underlying asset, making it possible to compare the performance of options with the price movement of the underlying stock or index. Advanced options trading charts may also include specialised information about volatility smiles and options flow analysis.

Types of Options Trading Charts

To learn how to use options charts effectively, it is essential to first understand the different types of trading charts available to options traders. Here’s an overview of the different types of options graphs and charts you may find.

• Price Charts

Price charts for options show the historical price movement of a specific option contract over time. They typically display the option contract’s premium and can include various time frames. These trading charts help you analyse trends, identify support and resistance levels and make decisions about entry and exit points for options trades.

• Candlestick Charts

Candlestick charts for options provide a detailed view of price action over specific periods. Each candlestick shows the open, high, low, and close prices for an option. These options trading charts help you identify patterns and potential reversals in option prices — which is quite similar to how they are used in stock trading.

• Payoff Charts

Also known as profit-loss diagrams, payoff charts help you visualise the potential outcomes of an options strategy at expiry. Samco’s Options B.R.O. takes this one step further and shows you the payoff on different target dates till expiry. You can also assess the breakeven points and the maximum gain and loss.

• Implied Volatility (IV) Charts

Implied Volatility options charts display the market’s expectation of future volatility. They can show you the IV across different strike prices (volatility smile) or different expiration dates (term structure). You can use these charts to identify potentially overpriced or underpriced options and gauge market sentiment about future price movements.

• Heat Maps

Options heat maps use colour coding to represent large amounts of data at once. They can display information like changes in implied volatility, volume or open interest across multiple strike prices and expiration dates. Heat maps allow you to quickly spot areas of high activity or unusual patterns in the options market.

• Greeks Charts

These charts display the option Greeks (delta, gamma, theta and vega) over time or across different strike prices. This essentially allows you to identify how sensitive an option's price is to various factors like the underlying asset’s price changes, time decay or volatility fluctuations. Greeks charts are crucial for evaluating strategies and managing risk.

• Options Chains

Option chain charts present a visual representation of the entire option chain for a particular underlying asset. They typically show you all the available strike prices, bid/ask prices, volume and open interest for both calls and puts across different expiration dates. These trading charts thus give you a comprehensive overview of all available options.

Tips to Use Options Trading Charts Effectively

Now that you have seen what the different types of options trading charts entail, let us discuss how you can make the most of these different charts. Here are some tips that can help you use the charted data effectively.

• Understand the Components in the Chart

Familiarise yourself with key elements of options charts — including strike prices, expiration dates and implied volatility. Get to know the option chain better as it displays available strike prices and expiration dates. Also, learn to interpret the bid-ask spread, open interest and volume indicators correctly. These components provide invaluable information about option pricing, liquidity and market sentiment. By mastering these fundamentals, you will be better equipped to analyse options chart patterns and make informed trading decisions based on the visual data presented.

• Utilise Multiple Time Frames

Try not to limit yourself to a single time frame when you are analysing options graphs. It is best to combine short-term and long-term charts to gain a more comprehensive view of price action and trends. Short-term charts (like 1-minute or 5-minute variants) can help identify entry and exit points for day trading, while longer-term charts (like daily or weekly variants) provide context for broader market trends. This multi-timeframe approach allows you to spot potential trend reversals, support and resistance levels and chart patterns that may not be visible in a single time frame.

• Monitor Implied Volatility

Monitor implied volatility (IV) when using options trading graphs. IV is a critical factor in options pricing. It can also significantly impact your trading decisions. Many options charts include IV information, which is often displayed as a separate graph or as an overlay. High IV typically indicates increased uncertainty and higher options premiums, while low IV points to lower premiums and potentially less fear in the market. By tracking IV trends and comparing them to historical levels, you can gauge market sentiment easily and identify potential opportunities for options strategies.

• Analyse Volume Patterns

Study the options volume patterns on trading charts. High volume often indicates a strong interest from traders. It can validate price movements or breakouts. Look for volume spikes, which may signal important events or shifts in market sentiment. You can also compare option volume to open interest to gauge market activity better. Unusually high volume relative to open interest might suggest increased trading activity or potential market reversals.

• Track Options Greeks

Incorporate options Greeks like delta, gamma, theta and vega into your chart analysis. They provide crucial information about how sensitive an option's price is to various factors. Many advanced options charting platforms allow you to display Greeks as overlays or separate charts. Monitor how these values change over time and across different strike prices. By understanding the link between Greeks and price movements, you can assess risk, optimise position sizing and even select appropriate strategies using Samco’s Options B.R.O.

• Use Heat Maps

Options heat maps give you a visual representation of large amounts of data. This makes spotting trends and anomalies easier. The colour-coded grids in these options trading charts typically display information like implied volatility, volume or open interest across different strike prices and expiration dates. With heat maps, you can quickly identify areas of high activity or unusual patterns in the options market. They can also help you spot potential opportunities — like options with unexpectedly high or low implied volatility, or strike prices with significant volume imbalances.

• Utilise PCR Charts

Pay attention to the put-call ratio in options trading charts. This metric shows you the relationship between put and call option volume or open interest and serves as a sentiment indicator — with high values typically signalling bearish sentiment and low values indicating bullishness. Ideally, you should look for extreme readings or divergences from historical levels, which may suggest potential market reversals. However, you must interpret this data cautiously because it can be skewed by hedging activities. It is best to combine put-call ratio analysis with other technical indicators and fundamental analysis.

• Study Options-Enhanced Candlestick Patterns

Explore options-enhanced candlestick charts that incorporate options data into traditional price candles. These might include volume-weighted average price (VWAP) levels based on options activity, or candle colours reflecting put-call imbalances. Some platforms offer candlesticks with ‘whiskers’ that show implied move ranges based on options pricing. These enhanced trading charts offer a unique blend of price action and options market sentiment, making it easier to spot potential divergences between stock price movements and market expectations.

• Identify Options-Based Support and Resistance

Look for strike prices with high open interest as they may be potential support and resistance levels. These levels act as price magnets because of high trading activity. Some experts also recommend paying particular attention to round numbers (like 50 or 100) and psychologically significant prices. When the underlying asset's price approaches these levels, you can check for increased trading volume and potential bounces or breakouts. By combining this options-specific analysis with traditional support and resistance techniques, you get a more comprehensive view of potential price barriers.

• Analyse Price-Volatility Divergences

Look out for divergences between price action and implied volatility (IV) on your options trading charts. If the underlying asset's price is making new highs while IV is declining, it might suggest waning momentum. Conversely, if the price is flat or declining but IV is rising, it could indicate building tension for a potential breakout. These divergences can be early warning signs of trend reversals or impending volatility spikes. With this analysis, you can adjust your options strategies easily. For instance, you can switch from directional plays to volatility-based strategies when divergences occur.

Conclusion

The bottom line is that options trading charts hold a wealth of information for interested traders. The secret to making the most of this data depends on the type of charts you use and how well you understand the data in those charts.

Samco Securities can help you gain access to advanced trading charts free of cost. All you need to do is sign up for a Samco demat and trading account, and you can use the Samco trading app — along with all its pioneering features — at no additional cost.

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