Knowing how to read an options chain is one of the important parts to understand if you’re to be trading options. There are many components that break down an option chain such as strike prices, expiration dates, calls and puts, extrinsic value, intrinsic value, bid vs ask spread, the Greeks, and more. Being able to correctly read this part of options is going to help you select the best strikes for trading. It’s important to understand the basics first because they make up the core components of the advanced options strategies. Watch our video on how to read an options chain.
How Do You Use an Options Chain & What is It?
- Remember that options are priced differently than stocks.
- An option chain shows all the major components of each contract.
- Such as expiration, open interest, volume, strike prices and Greeks.
- Pick your trading strategy and expiration date for your contract.
- Look for high open interest and volume as these are more “liquid”.
- Choose the strike price for your options contract.
- Determine entry and exit strategy before entering the trade.
- Place trade.
An OC makes up the foundation of trading options. Knowing how to read an option chain properly is key when options trading. The video above gives you an in depth tutorial on how to understand an option chain. An OC is the hub of options trading. Options chains show everything from calls and puts to strike prices. It’s the location where you can see a lot of information about a lot of options all in one place.
Hence the ability to read chains in options is critical if you’re venturing into this neck of the woods. The majority of brokers have everything needed to place an options trade in a chain. Options have many moving parts that affect price and profit.
The chain has everything there for quick scanning of activity, especially when you trade weekly options.
Basics of an Options Chain
They contain all the information needed to place a trade. It’s set up in a matrix and can be customized. You may have an options trading strategy where you look for certain things.
As a result, you’re able to add in filters to find what you’re looking for. An options chain displays open interest, price change, bid/ask spreads and volume.
Everything is listed in an easy to understand manner. You’re shown strike prices and expiration dates that allow you to find the right premium.
Options give you the right but not the obligation to buy (call) or sell (put) a stock at a specified price (strike). The chains are also laid out in a format that shows if a strike is in the money, at the money and out of the money.
Tight bid/ask spreads coupled with high open interest are the best kinds of options contracts to trade. All of this is available to options traders right in the options chart.
Where Are Calls and Puts Found in Options Chains?
Typically calls are found on one side of your options chain, and puts are found on the other. Depending on your broker, it will vary. On ThinkorSwim, call are on the left and puts are on the right. You can’t trade options without calls and puts. Calls take the bullish side of the market if you buy them vs sell them short. Whereas puts are the bearish side if you buy them, unless you sell them short. One of the great things about puts is the ability to make money when a stock goes down. This is an possibility if you’re a trader and your broker doesn’t have many or any shares to short of the stock you are currently bearish on!
As a result, options can make money in a market that goes up and down. There are some traders who can only make money in a bullish market. This is where selling options becomes so important.
However, the market trades in cycles. As a result, what goes up must come down. That means options trading has the benefit of capitalizing on both bearish and bullish price action!
Technical Analysis And Options
Knowing technical analysis is key to knowing which option is the best option to trade for whatever sentiment you have towards a stock. Being able to read trading indicators will tell you which direction the stock is going as well as the best entry and exit. Just never forget that price action is always leads indicators, as all indicators lag.
Using the daily chart is the best way to find patterns. However, some traders trade on shorter time frames and will use a different time frame to trade their chart. Patterns are also important in determining the direction of the stock. Understanding how to read stock charts is fundamental to your trading success.
What is OI in an Option Chain?
OI aka open interest shows the total number of outstanding contracts on an option chain. Each strike price has a different number of OI. Typically, the higher the open interest the higher the interest and better the liquidity of getting in and out of the trade.
You can make the layout fit your trading style. There may be things that are important to you; such as open interest and volume like show in the picture above.
You may only want to see the Greeks on your options chain or intrinsic and extrinsic value. You may even want all of it showing. That’s fine. However, that may be too many things to look at at once. Most broker platform layouts can’t fit everything in. So find out what you need and what you don’t need and keep your work space clean!
Open interest is a good thing to have on your layout. It shows you how many other traders are interested in a strike price. You may want to buy a call on a stock with a $10 but the open interest is only 120. That is typically considered low.
Whereas the open interest on the put side is 2,346. That tells you a lot more traders thing that stock is going bearish. You may then want to reconsider and take a look at the charts to see what the patterns are telling you.
Strategies & Options Chain
There are many different options trading strategies because you can make money in any market. Hence the huge appeal of options. There’s a strategy if the market is up, down and even trading sideways, so you’ll never be bored or sitting on the sidelines if action is what you crave.
Because options give us so much opportunity, simply pick your strategy and head to the option chain and get to work. For example, a stock is trading in a narrow range and not moving much. You can trade an iron condor and make money on a stock trading sideways.
Let’s say you want to trade a stock that’s moving up but you don’t have a lot of money to risk. You can trade vertical spread. You’re limiting your risk by not placing a lot of capital into the trade.
Naked calls and puts are also there to be traded. If you see a stock that’s ripping in either direction and you want in, you can trade a call or put. The great thing about options is that one contract controls 100 shares, which you can then own later, if you want. Or you can just trade options like a game of hot potato. The choice is yours.
So you get the advantage of trading 100 shares per contract without having to pay the price for owning 100 shares. In essence, no matter your strategy, it’s all there in the options chain for you. Make sure you take our options trading course.
The Bottom Line
An options chain is where traders go to get important information. They allow you to place the trade you want and clearly lay out the bid, ask, strike price and expiration date. Even taking the time to understand an options chain is important.