Basics of Reading an Option Chain

Welcome Potential Option Traders!

Options are a type of derivative as they derive their pricing from an underlying asset such as a stock, ETF, or whatever security the option is being made available for.

I am going to walk you through how to read an options chain, which is a table of data for all the options available for a security.

An option chain is a table of data that tells you more than just the price of the option, but things like how many options were ‘opened’ on the day, (Volume), how many are currently ‘open’ since that option started trading to present, (Open Interest), and some chains have data with columns of information of what are called the ‘Greeks’ – which are factors that can influence the price and the potential change in prices of options.

Below is an example of an Options Data Table

At first glance it may be overwhelming to look at all the data, the symbols and column headings and try to figure out what in the heck you are looking at let alone know how to use this information to make a trading decision.

Take a breath, relax a second and know that you will know what this data is showing and how to use it by the time you are done reading this education.

Not all brokerage sites will have the exact same look. 

Let’s get you started on the Basics of an Option Chain

Remember each brokerage firm and financial website that list option data tables will have their own unique look and format to them.

The are only two types of options Calls and Puts.

The tables will usually have these tables of data for each side by side as you see in Figure 1, (sometimes like with Yahoo Finance the options data tables page will have the Calls and Puts stacked with the Calls first and Puts underneath).

For the most part the primary info listed on the option data tables is the Date of expiration, (sometimes the symbol for the option will be listed with it).

Option Symbol (OpSym): The ticker symbol for the option, which includes: 

• Underlying Ticker: The ticker of the underlying stock.
• Expiration Date: When the option expires.
• Strike Price: The price at which you can buy (Call) or sell (Put) the underlying asset.

The Strike Prices for that option. The more liquid or in demand options for that security is the more different strikes will be available. There may be only monthly options listed, but some if in demand enough will even list weekly options for the security.

The Bid and the Ask (which makes up the quote of that option.

Volume and Open Interest.

Volume is the amount of options contracts ‘opened’ that day (Opened means a trade has been taken whether it was bought to open or sold to open).

Open Interest often times referred to as the OI is the number of ‘open’ contracts so far that day that currently exist since the options were first listed or made available. Once an option contract is closed it reduces the OI number.

To recap thus far. An option change will usually have the Date of Expiration, Strike Price, Bid / Ask, Volume and Open Interest.

If you are using a real time quoting service the Last Price and the  Price Change and Percentage Change are likely to be listed as well.

A quick glossary, if you will, on the above listed items the Option Data Table shows.

Strike – The option strike price.

Type – Shows whether the option is a call or put (see An Introduction to Options)

Bid (pts) – The last bid price. The price buyers want to pay.

Ask (pts) – The last ask price. The price sellers want to sell the option.

Volume– The total volume of the option that day.

Open Interest – The open interest of the option that day.

There may be a capability of your brokerage site that in the options tables you can get a % to Double calculation.

More Advanced Options Data May be Available

Stock Pct to Double Bid/Ask (%) – The percent the stock must move for the option price bid or ask to double in value and the option be profitable. It’s negative for puts as the stock has to go down for a put to be profitable. Note that a stock can only go down 100%, so not all puts have a % to double number.

There are some services, either on your brokerage trading platform or on a financial education website where their option data table lists the Greeks. 

The Greeks tell us what can happen to our option position if price, time, or volatility change.

Delta (%) – Measures the change in an option’s price for a $1 move in the underlying asset. 

Delta values range from 1.0 to -1.0. A positive Delta is for Calls and a negative delta is for Puts.

Gamma (%) – Sometimes called the Delta of the Delta. Gamma is the rate of change for an option’s delta based on a single point move in the delta’s price.

Vega (pts/$IV) – Measures how sensitive an option’s price is to changes in the implied volatility of the underlying asset. It is the extent to which an option’s premium/price will change given a 1% change in the asset’s implied volatility.

Theta (pts/day) – It is the rate of decline in the value of an option over time. If everything (price of the asset and other components) stays the same an option will lose value as time passes by as the expiration date nears. Theta is also referred to as Time Decay.

When you hare first starting out looking at Option Data Tables, you may not feel comfortable with the Greeks but given a repetitious approach to learnings these and seeing how they affect the pricing of an option you may grow to love them or at least appreciate what they signify and want them in your option data tables.

The Process of Reading and Options Data Table

When you go to your Options Data Table make sure to first and foremost click or choose the Month’s expiration you want to research.

Then look at either the Calls or Puts part of the table.

Make sure it lists the Strike Price or prices you want to research. You may have to expand the % of strikes listed compared to the security price to bring in more strikes to view.

Look at the Volume and Open Interest to make sure there is the amount of activity you want to see going on with that strike. You may read elsewhere a requirements to have at least 100 contracts in the Open Interests (OI) column and maybe even in volume.

Though those are means of assessing liquidity, just know the best indication of liquidity is the difference between the Bid / Ask numbers. The tighter or closer those numbers are to each other the better the liquidity. A factor you can try is to take the difference between the bid/ask numbers and if that is less than 1% of the security’s price that is what I consider a tight bid/ask to spread and is a situation where there is good liquidity.

Liquidity makes getting into and out of option trades more efficient. An example of a bid/ask spread or quote is $1.05 x $1.07. An example of poor liquidity is a quote showing $1.05 x $1.75.

6-Points to Review when Reading an Options Data Table

I am showing the Calls option data table for Microsoft (MSFT), but it is a similar process for any security and for the Puts option data table as well.

1. In the table above it says ‘OpSym’ which stand for ‘Option Symbol’.  Options have their own ticker symbol based on the security ticker symbol along with the date of expiration, a letter  C or P for the type of option it is, and the strike price number. This allows for you and or the broker to look up the pricing for the specific option.
2. The Strike Price column. Remember if there isn’t a strike listed you are looking for it either does not exist or you have to adjust the tables to show a greater number of strikes.
3. The two columns, one for Bid and the other for Ask constitutes the quote for the option.
4. IV or Implied Volatility. This umber represents to me if the option is fairly priced, inexpensive over-priced. Compare that number to its value over a certain number of days in the pat (I tend to start by looking at the 30-day At the Money IV) and see if it is in its historical lower part of the IV range. If it is too high I say away from a long option trade on the security.
5. Volume. This is the number of contracts opened on the day.
6. Open Interest or (OI). This is the number of contracts that exist on the day (from the time the option was made available to present).

It is not numbered above, but it is the GREEKS. If you can get them and place them on your option data tables that would be good information to have.

Remember if you are using a real time quoting service the columns for Last = Last or current price, Change (profit or loss at that time), and Change % (% gain or loss at that time) may also be available.

Note, these aren’t necessarily the only 6 things you can look at when reading an option table, but it is a solid foundation to start with.

Once you get used to going through this process you will be able to establish for yourself what of these 6-items you want to keep using, which you want to remove or not look at and then what additional data you want and can see if your options data table has that capability to add and place that info in there.

Enjoy your continued education in Options Trading and I look forward to educating you further as there is much more to learn!

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