Option Chain – What It Is and How To Read It

Many investors want to trade options but don’t know where to start. Unlike equities, it takes a bit of research to understand how option trades work. Strike price, implied volatility, and open interest – the terminology can be confusing.

In this guide, we’ll show you everything you need to know about how to read an option chain. Then, we’ll break down all the little details, so you have the confidence you need to make your first trade.

What Is an Option Chain?

An option chain provides a list of various data — tallying prices, expiration dates and selling activity for call and put options of a given stock.

The data is displayed in real-time, which gives you a window into how the market is behaving and what is required to complete a particular trade.

So what is the best option chain website?

We recommend Nasdaq.com. It’s a reputable service and one of the largest stock exchanges in the world, providing real-time updates and plenty of other helpful market information as well, or alternatively, the option chain provided within your brokerage account.

How to Read an Option Chain?

When breaking down an option chain, a visual aid always helps. For example, take a look at the image below. It’s the most recent option chain for Nike (NKE).

So how do you read option symbols?

Well, let’s start from the left and work our way right.

Expiration Date

At the top of the picture, you can see the Date. This column represents the expiration dates for various call and put options. Calls are in the left column, and puts are in the right column. So, when you click on a particular month in the checkbox above, you find all the necessary data about contracts expiring within that time frame.

So how does options expiration work?

Think of it like a carton of milk. An options expiration is similar to a milk’s best before date. If you don’t exercise your position by the expiration date, it’s worthless. And like sour milk – you throw it away.

Last (Current Market Price)

The ‘last’ figure describes the last price an option sold for. For example, check out the second row with the 10.86 figure. This means the most recent January 28, 2022 call option contract sold for $10.86.

Change

What is the net change in an option chain? Well, take a look at the right side of the image. Under Change, you’ll notice a -3.59 two rows from the top. This tells you the change in the option price from the most recent contract compared to the one before it.

For example, the last price for a Jan 28, 2022 call option is $10.86. That represents a $3.59 decline from the day prior.

Bid-Ask (Bid price and Ask Price)

Bid-ask quotes are like a supply and demand tug of war. Buyers – who set the bid – want to buy options at the lowest possible price. Sellers – who set the ask – want to receive the highest possible price, so they ‘ask’ buyers for more money. The main takeaway is the bid is always less than they ask. The logic is the same as bid-ask quotes you see for traditional stocks.

Volume

Volume is extremely important. Like a stock – it determines the level of liquidity in a financial instrument. With options, volume measures the number of contracts exchanged within that day for a given expiration date. For example, one contract sold per day contributes 1-unit of volume to the statistic.

Looking at the chain, you’ll notice that volume is 0 for all call options, with a strike price of $132.00 in the first row. The takeaway is: no option contracts have been exchanged on that given day.

Open Interest

If the volume is Batman, then open interest is Robin. Open interest tells you the number of option contracts that have yet to be exercised. American options – unlike European – can be exercised at any time.

However, because option prices have embedded time value, traders avoid exercising early. Doing so is like giving away free money. It’s better to sell the option contract to another trader to ensure you receive full value.

Strike Price

Now we’ll get into the important details. When you buy an option contract, you specify the particular strike price. For a call option, the strike price represents the price at which you can buy the underlying stock, should you decide to exercise the option.

A put option represents the price at which you can sell the underlying stock, should you decide to exercise the option. Again, keep in mind, we’re describing this from a buyer’s perspective.

The strike price is one of the most important factors because it determines the premium you pay for the option. When an option is in-the-money, you pay more. When it’s out-of-the-money, you pay less.

In-The-Money (ITM) and Out-Of-The-Money (OTM) Options

Analyze the new section of the Nike (NKE) options chain. The shaded areas on the left represent in-the-money call options, and the shaded areas on the right represent in-the-money put options.

ITM options have what traders call ‘exercise value.’ This represents a sum of money already priced into the option premium. Nike’s (NKE) stock is trading at roughly $145.91, so we’ll use the 145-strike call option to explain.

If you bought a 145-strike call right now and exercised it, you would make a profit of $145.91 (price per share)-$145.00 (strike price) = $0.91 cents per share. Because of this, option sellers add 91 cents to the cost of the option.

The rest of the option premium — $1.25 minus 91 cents – represents the cost of time value and implied volatility.

Implied Volatility (IV)

Implied volatility (IV) is the single most important factor determining option prices. IV is financial jargon for the statistical term standard deviation (SD). When traders use price options, they assess how likely a stock is to jump above the strike price for a call option or fall below the strike price for a put option.

Using a normal distribution bell curve, a 1-SD move infers a 68% probability, a 2-SD move infers a 95% probability, and a 3-SD move infers a 99% probability – assuming a historical sample repeats itself.

Now, from a seller’s perspective, dealers and traders use these probabilities to decide how much they’re going to charge you for the option. It is also important to recognize when an IV crush happens.

Summary

It is crucial to understand how you have to read an option chain. As an option trader, it will become one of your main tools and chances are that you will place your orders right from the options chain.

You should never start trading options without paper trading. Remember that! Options are complex, from current market price, strike price, bid price, ask price to the expiration date and open interest – there are so many important aspects to care about.

While trading stock primarily focuses on the current stock price, options trading requires much more attention to the price of an option, stock option contracts details, strike prices and more.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.