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How to Read an Options Chain

Whether a trader is looking to pad a long position by writing a covered call or buy a protective put for shares that the trader has shorted, knowing how to read an option chain should precede either one of these potential strategies.

The option chain lists the available call and put strike prices for an underlying security. It also lists the month of expiration for each available option. It is important to keep in mind that one call option, is a contract that gives the holder the option to purchase 100 shares of the underlying security. A put option, is a contract that gives the holder the options to sell 100 shares of the underlying security.

How to Read an Options Chain Whether a trader is looking to pad a long position

In the options chain above, the call options are listed on the top and the put options on the bottom. In this instance the options listed are for Capital One Financial common stock. The month of each expiration date are listed horizontally across the top of the screen. As the trader clicks on the month, the exact date of expiration appears.

Strike

The strike price, also know as the exercise price, is listed in the first column. In

the case of

a call,

this

is

the fixed price at which a trader can purchase the

underlying security. In the instance of a put, it is the fixed price at which the option holder can sell the underlying security. The strike price is independent of the current market price of the security.

Options that are “in-the-money” are highlighted. For a call option to be “in the money”, the current market price must be greater than the strike price. For a put option to be in-the-money, the current market price must be less than the strike price.

Symbol

Just as stocks have ticker symbols, so do options. The symbol is merely a way of identifying the strike price and month of expiration for the option in question. For example in the case of Capital One, the May $60 call option has the ticker COFEL.X. The symbol is listed in the second column.

Last

The third column shows the price at which the last trade for that specific option

was executed at. It can be thought of as the market price for the option, or a

“quote” for the option. In the case of Capital One, the May $40 put option is

trading at $0.15 per put option.

Change

The next column lists the change in price of the option. Generally, it shows the trader by how much the option has risen or fallen since the previous market close.

Bid/Ask

The next two columns refer to an option’s current bid price and its current asking

price. Taken together these two numbers are more commonly known as the bid/ask spread. If a trader were to buy an option, they would end up paying an amount approximately equal to the listed ask price to acquire that option. If a

trader was looking to sell or “write” an option, the trader would receive the listed

bid price for that option.

Volume

The volume column lets the trader know how many option contracts have been traded during the trading day.

Open Interest

The final column shows the open interest for the option. The open interest lets the trader know how many open contracts that are in existence since the option was open for trading. Options that have been sold or exercised to close a position, are deducted from the open interest number.

Using An Option Chain In Practice

Once a trader is able to read the option chain, the trader is able to put this

knowledge to work. To see an option used in practice, let’s take the case of the

May $50 call option for Capital One. Let’s assume that the current market price of Capital One shares is $54, but we expect shares to go higher before the option expires on May 16. Looking at the ask price of $4.60 per contract, the trader could expect to pay around $460 for one call option that would give them the right to buy 100 shares of Capital One at $50.

Open Interest The final column shows the open interest for the option. The open interest lets

As long as the option is “in the money”, it is in the trader’s best interest to

exercise the call option prior to expiration. Because there is a cost to the option, $460 in this case, the trader is actually expecting shares of Capital One to go above $55. $55 is the break-even point, because at $55, the trader is able to buy 100 shares at $50 (for a total of $5,000) using the call option and then turn around and sell the 100 shares at $55 on per share on the open market for a total of

$5,500. After taking into account the $460 premium to purchase the option, the trader is now roughly even.

For traders who are new to options, an option chain can seem a little bit complicated when seen for the first time. Once the trader knows how to read an option chain, the trader is well on their way to being able to utilize options to hedge risk in daily trading.

So what is a Stock Option Chain?

An option chain is a list of all the stock option contracts available for a given security (stock).

There are only 2 types of stock option contracts, puts and calls, so an option chain is essentially a list of all the puts and calls available for the particular stock you're looking at.

Now that wasn't so hard to understand was it? Well the confusing part comes when you actually pull up a stock option chain.

$5,500. After taking into account the $460 premium to purchase the option, the trader is now

All that easy-to-understand information suddenly gets lost in translation and you're left looking at a table full of numbers and symbols that make absolutely no sense at all.

How to Read a Stock Option Chain

Part of the confusion in understanding option chains is that every option chain looks different.

If

you go to Yahoo, MSN, CBOE, or your brokerage account and pull up an

option quote, you will notice that the layout of each of their option chains is completely different.

They all essentially have the same information displayed, but look completely different.

Let's use a snippet of the stock option chain listed above, which is a Yahoo stock option chain of the stock symbol "MV":

All that easy-to-understand information suddenly gets lost in translation and you're left looking at a tableYahoo stock option chain of the stock symbol "MV" : Expiration Months As you can see from the picture there are several different expiration months listed horizontally across the top of the option chain (Aug 09, Sep 09, Dec 09, etc.). For our example we are looking at all the call and put options that expire the 3 week of December 2009. " id="pdf-obj-4-20" src="pdf-obj-4-20.jpg">

Expiration Months

As you can see from the picture there are several different expiration months listed horizontally across the top of the option chain (Aug 09, Sep 09, Dec 09,

etc.). For our example we are looking at all the call and put options that expire the

Some traders want to stay in a trade 1 week, some want to stay in months, so your trading plan will dictate which month you look at.

a

trade 2

I like to give myself plenty of time for the trade to work out so I always try to look at options that expire 2-6 months from the current date.

Calls Options and Put Options

Each stock option chain will list out all the call options and all the put options for the particular stock. Depending on which option chain you are looking at, the call options may be listed above the put options or sometimes the calls and puts are listed side-by-side.

Strike

The first column lists all of the different strike prices of the stock that you can trade. The strike/exercise price of an option is the "price" at which the stock will be bought or sold when the option is exercised.

Symbol

The second column lists all of the different ticker/trading symbols for each stock option.

"MVLLE.X" is the ticker symbol for the 09 December 25 call option. The symbol identifies 4 things: which stock this option belongs to, what the strike price is, what month it expires in, and if it is a call or a put option.

Last

The third column lists the last price at which an option was traded (was opened or closed). It's the price at which the transaction took place. Be aware that this transaction could have been minutes, days, or weeks ago, and may not reflect the current market price.

Change (Chg)

The fourth column lists the change in the options price. It shows how much the option price has risen or fallen since the previous day's close.

Bid

The Bid price is the price that a buyer is willing to pay for that particular stock option. It's like buying a home at an auction, you bid (offer) what you are willing to pay for the home.

When you are selling an option contract, this is usually the price you will receive for the stock option.

Ask The Ask price is the price that a seller is willing to accept for that particular stock option. This is the price the seller is "asking" for.

So when you are buying an option contract this is usually the price you will pay for the stock option.

BE CAREFUL: remember one stock option contract controls 100 shares of stock. So whatever Bid/Ask price you see has to be multiplied by 100. This will be the actual cost of the contract.

Volume (Vol)

List how many stock option contracts were traded throughout the day.

Open Interest (Open Int)

This column lists the total number of option contracts still outstanding. These are contracts that have not been exercised, closed, or expired. The higher the open interest, the easier it will be to buy or sell the stock option because it means a great deal of traders are trading this stock option.

Watch the video below to get instructions on how to find the stock option chain for a stock:

When you are looking at the stock option chain there are 7 factors that will affect what stock option you choose:

1.

Direction

You're either going to look at the Call option or the Put option portion of the option chain. If your analysis tells you that the stock is going to rise

higher, you evaluate the Call option portion of the option chain. And vice versa for Put options.

  • 2. Duration The next step is to figure out how long you plan on staying in the trade. If you want to give the trade 2 months to work out, then you look for options that are going to expire 3 months out. Why 3 months out? It's because of the 30 day rule we discussed in the strike price lesson.

  • 3. At-the-Money (ATM) This rule is simple. You're going to pick the At-the-Money (ATM) stock option. This rule was also covered in the strike price lesson.

  • 4. Can you afford the option If you can't afford the ATM option, then you can look for a closer expiration month or move on and find a trade on a stock where you can afford the stock options.

  • 5. Open Interest Only buy stock options with an open interest of 100 or higher. This ensures that there are enough people trading the option to make it worth your time. The more people trading the stock option, the easier it will be to buy and sell the option.

  • 6. Comparison Shopping Here you simply look for the best value. Check out the price of stock options for other expiration months and see if you can find a good deal. Maybe you will find a stock option that expires 2 months later, but only costs a few dollars more.

  • 7. and the Bid/Ask spread You want to make sure the Bid/Ask spread is small (for ex. $4/4.2). If it's too wide ($4/$5) then it may mean that this stock option is not in much demand. Also keep in mind that you have to multiply the cost by 100. So $4/.2 is a difference of $20 and $4/$5 is a difference of $100.

The Options Chain Sheet

Options are most frequently quoted in a list format called a “chain sheet.” Each chain sheet has several components and although they are not complicated but it would be helpful to walk through each section so you understand what to look for when evaluating an option trade.

[VIDEO] The Options Chain Sheet

In this article, we will be using a typical chain sheet for the stock Microsoft Corp (MSFT) for demonstration. Keep in mind that every online broker uses a slightly different version of a chain sheet. However, they are similar enough that it is usually not a challenge for a trader to shift from one version to another.

Each element of the chain sheet are described below. The numbers reference each

element’s position on the image below.

The Options Chain Sheet Options are most frequently quoted in a list format ca lled ahttp://www.learningmarkets.com/the-options-chain-sheet/ In this article, we will be using a typical chain sheet for the stock Microsoft Corp (MSFT) for demonstration. Keep in mind that every online broker uses a slightly different version of a chain sheet. However, they are similar enough that it is usually not a challenge for a trader to shift from one version to another. Each element of the chain sheet are described below. The numbers reference each element’s position on the image below. The Options Chain Sheet Calls and puts (1) Chain sheets are arranged with calls on the left hand side of the list of options and puts on the right hand side. In some chain sheet versions, the calls and puts are in a single list but the format below is more common. " id="pdf-obj-8-18" src="pdf-obj-8-18.jpg">

The Options Chain Sheet

Calls and puts (1)

Chain sheets are arranged with calls on the left hand side of the list of options and puts on the right hand side. In some chain sheet versions, the calls and puts are in a single list but the format below is more common.

Strike prices (2)

The available strike prices are listed down the center of the chain sheet. There is a call and a put contract that correspond to each strike price. If you need some help understanding what a call or put is, click here first.

Bid and ask (3)

Each call and put at every strike price has a listed bid (sell price) and ask (buy price). These prices are quoted per share, which means that you need to multiply it by the number of shares per contract, or 100. That will tell you how much a single contract will cost to buy, or is worth to sell.

Open interest (4)

The number of contracts of a call or put at a specific strike price currently held by other investors.

Volume (5)

The number of contracts of a call or put at a specific strike price bought and sold today.

Extra info (6)

Depending on your broker, there may be several other columns for each option contract. This extra information may include last trade price, implied volatility or some of the option Greeks. The most critical information, however, is contained in items 1-5 of the chain sheet.

Options chains

What are options - and why might investors consider adding them to their portfolio mix? In this back-to-basics series, TradeKing’s Brian Overby explains options from scratch, covering opportunities to risks. This post continues a discussion on options quotes, explaining options chains.

Welcome back-to-school, investors! Recently TradeKing has attracted literally thousands of new investors, many of whom are brand-new to the markets and curious about options. This series is our attempt to get them started right.

So far we’ve defined options, both calls and puts, explained what sports and movie contracts have in common with investment options, and showed how an option contract’s terms are spelled out in its name. Today we’ll discuss a related concept, how to get options quotes using options chains.

As I explained last time, “options quotes” encompasses a bigger concept than a simple stock quote does. IBM may have one major “quote”, divided into bid and ask prices, for its stock, but it may have dozens of options quotes with IBM as the underlying stock. You can access this list, or “chain” of options quotes at TradeKing at Quotes + Research > Option Chains. (Don’t forget to login first.)

In the screenshot below, you’ll see IBM’s option chain.

Options chains What are options - and why might investors consider adding them to their portfoliodefined options, both calls and puts, explained what sports and movie contracts have in common with investment options , and showed how an option contract’s terms are spelled out in its name . Today we’ll discuss a related concept, how to get options quotes using options chains. As I explained last time, “options quotes” encompasses a bigger concept than a simple stock quote does. IBM may have one major “quote”, divided into bid and ask prices, for its stock, but it may have dozens of options quotes with IBM as the underlying stock. You can access this list, or “chain” of options quotes at TradeKing at Quotes + Research > Option Chains . (Don’t forget to login first.) In the screenshot below, you’ll see IBM’s option chain. " id="pdf-obj-10-31" src="pdf-obj-10-31.jpg">

First check out the search criteria at top. Because I knew my underlying ticker symbol (IBM), I plugged it straight into the search box. But if you don’t, you can always start at Quotes + Research > Quotes + News + Research, and use the “Symbol Lookup” text link to the right of the search box.

I used the default search criteria: I wanted to see near-the-money option contracts of both kinds (calls and puts), and I limited my search to the closest expiration month in this case, Nov09.

What’s “near-the-money” mean? Well, to explain that we should first look at the IBM stock quote in the top center of our options chains. As of this writing, IBM was trading at 123.06. Some strike prices for options already have value, based on this underlying stock quote for example, the 110 call gives you the right to buy IBM stock for $110, when the market price is $123. (To find the 110 call, check out the gray stripe at center that lists the strike prices on IBM in this chain.

You’ll see the 110 strike is right at top, with calls to the left and puts to the right.)

Similarly, the 135 put gives you the right to sell IBM at $135; compared to a market price of $123, the put owner is sitting pretty.

Both the call and the put I mentioned above are “in-the-money” based on the current price of the underlying, they have intrinsic value that could be immediately turned into cash, if the option holder chose to. That is, that put owner could immediately exercise and sell IBM for $135, even though everyone else has to sell IBM at $123. There’s $12 of intrinsic, in-the-money value in this put.

On the flip side, some options are “out-of-the-money”. It does me no good right now to be allowed to buy IBM for $135, if I can buy at the market price for cheaper, $123. Similarly, nobody gets too jazzed about being allowed to sell IBM for $110 if the market can fetch me a higher price, $123. These options are therefore “out-of-the-money” – they currently have no intrinsic value.

However, options have two types of value to consider. While only some of them have intrinsic value they could be immediately converted into cash, based on the current underlying price they all also have time value. Simply put, we have no idea what’ll happen to IBM’s stock price between now and 11/20, when the

Nov IBM options will expire. During those 33 days, many of these options could go in-the-money (ITM) or most out-of-the-money (OTM), or swing back and forth between the two. That X-factor is reflected in an option’s time value.

You can see intrinsic and time values reflected in any option’s price. Check out

the 135 call, the most out-of-the-money call in this chain. See the “Bid” and “Ask” columns to the left of the gray “Strike” column? As with stocks, the ask is the price you can buy at in this case, 0.25 and the bid is the price you can sell at 0.20. Even though this option contract has zero intrinsic value now, it still has 33 days until expiration. In other words, it’s not worthless – it’s still got potential

to move, which translates into time value.

Similarly, look at the very in-the-money (or ITM) 135 put, at bottom on the right. You can buy this put now for $12.80 (the ask), which gets you $12 of current intrinsic value. The other $0.80 can be chalked up to time value.

So far, we’ve talked about some of the columns in an options chain, but not all. What is “open interest”, “delta” or “IV”? And what’s with the funny options symbols like IBM.KB? I’ll unpack those concepts in my next post. See you then!

Regards,

Brian Overby TradeKing's Options Guy