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Reading an option chain, or option pricing table, is a fundamental skill to master before stepping into any option trade. In this post, we’ll show you how to read an option chain step-by-step.
An option chain, simply put, is a list of all of a stock’s option contracts which are currently available to buy or sell in the market. Think of it as a catalog which lists each option contract’s associated price and related specifics such as Greeks, volume, open interest, and probability in-the-money.
Let’s take a look at what an option chain looks like:
This is the first of two screens that you will see when navigating an option chain.
The first feature that you will notice is a list of dates (Feb 16, 2018, Jan 26, 2018, etc.) on the left-hand side of the screen. Option contracts have a finite life, meaning that they expire at a defined point in the future. The first step to making a trade is to pick an expiration date. The list of dates on the left is a list of the expirations available to trade for this particular stock at the time of this writing, and they range from January 2018 to January 2020.
The center column denotes the number of days left until expiration for each option. For example, looking at the row for the March 16, 2018 expiration date, you can also see that there are 53 days until expiration in the middle column.
There are many factors to consider when picking which expiration to trade. Here are some questions to consider:
● Is outlook on the stock a short-term or long-term view?
● Is it a short-term earnings trade?
● Are you buying or selling the option contract?
These considerations aside, as a rule of thumb, we typically trade options with close to 45 days until expiration. This is the point in time when theta, or the time decay portion of the option price, begins to accelerate with the least amount of risk. As options sellers, theta is beneficial for our positions, making the 45-day timeframe a strategic choice.
Let’s now open the March 16, 2018 expiration options and see what those look like.
This is a snapshot of the option chain. Here, you can see the prices of different option contracts for the March 16, 2018 expiration cycle. Each row in the table is an option contract.
Here are a few features to note in this option chain, which we will elaborate on further: calls vs puts, bid vs ask, delta, and ITM%.
There are two types of option contracts: call options and put options. Call options give the buyer the right, but not the obligation, to buy 100 shares of stock at or before expiration. On the other hand, put options give the buyer the right, but not the obligation, to sell 100 shares of stock at or before expiration.
Calls and puts are both listed listed within the March 16, 2018 expiration cycle. Calls options take up the left-hand portion of the table, and put options take up the right-hand portion of the table. The center column dividing the two shows the related strike prices. All the listed contracts expire on March 16, 2018.
The strike price is the price at which the option buyer and seller agree to transaction stock. For example, a call option gives the buyer the right to buy 100 shares of stock at the strike price on or before expiration. Taking a look at the option chain, the center column shows strike prices that range from 115 all the way to 134. Looking at the 123 strike, the left side of the column shows the 123 strike calls, while the right side of the column shows the 123 strike puts. What this means is that for the call options, the call buyer has the right, but not the obligation to buy 100 shares of stock at a price of $123 per share. Likewise, the put buyer has the right, but not the obligation to sell 100 shares of stock at a price of $123 per share.
We explain more in depth about the strike price and other option contract specs in this post.
Looking at the two innermost columns from the center, there is a column that says “Bid” and another that says “Ask.” The bid and ask columns indicate the price for that specific option. The reason that there are two prices for the option contract is because the “Bid” price is the price at which someone is willing to buy the option from you, while the “Ask” price is the price at which someone is willing to sell the option to you. For simplicity, the single price is the average of the bid and ask price.
For example, looking at the $123 strike:
• The $123 strike calls (on the left-hand side) have a bid price of $1.98 and an ask price of $2.06.
• The $123 strike puts (on the right-hand side) have a bid price of $2.10 and an ask price of $2.20.
Note: these numbers are listed per share, but option contracts represent 100 shares, so the true dollar value of the option contract is the price x 100. For these options, that would be in the range of $200 .
Lastly, looking at the outermost parts of the table, you’ll see columns for delta and ITM%. These outer columns are customizable with any of the metrics seen in the drop-down menu, and can add additional information and metrics about the specific option contract to help you make more informed trading decisions. In this example, delta helps gauge the directional risk of the option contract, while ITM% shows the probability that the option contract will expire in-the-money.
The option chain might initially look complicated, but each of these pieces provide information necessary information for informed, successful options trading. When broken down this way step-by-step, it’s much easier to see how to use the option pricing table as you begin trading options.
If this explanation of the option chain was at all helpful, let us know in the comment section below!
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