Knowing how to read an options chain is one of the important parts of understanding if you’re to be trading options. Many components 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 read this part of the options correctly is going to help you select the best strikes for trading. Understanding the basics first is important because they comprise the core components of the advanced options strategies.
An options chain makes up the foundation of trading options. Knowing how to read an option chain properly is key when options trading. They show everything from calls and puts to strike prices. It’s the location where you can see a lot of information about many options in one place.
Options Trading Course
Knowing how to read an options chain is one of the important parts of learning and understanding if you are trading options. Many components are within an option chain, such as strike prices, expiration dates, and the options, such as calls and puts. Most brokers offer options chain columns showing the options price (bid, ask, and mark).
Still, there are columns such as extrinsic value, intrinsic value, bid vs. ask spread, all the various Greeks (such as Theta, Vega, Delta, Gamma), and even things such as the implied volatility of the option’s strike. Of course – there can be even more options columns than this – depending on who your options broker is.
Being able to read this part of the options correctly is going to help you select the best strikes for trading. Understanding the basics first is important because they comprise the core components of the advanced options strategies.
Some brokers offer options chain columns such as ITM, OTM, Probability of Profit (or “POP”), “opt” on volume, open interest, and many more.
In the picture below – we can see that TOS offers a lot of options chain columns that a trader can add to the options chain to understand better how that options price is doing and how the strikes are currently different than other strikes at a different expiration.
What Is an Options Chain?
An options chain makes up the foundation of trading options. Knowing how to read an option chain properly is key when options trading. They show everything from calls and puts to strike prices. It’s the location where you can see a lot of information about many options in one place.
Reading chains in options is critical if you’re venturing into this neck of the woods. Most 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 for quick activity scanning, especially when trading weekly options.
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 can add 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 chain.
Calls and Puts
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, calls 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. At the same time, puts are on 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 possible 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!
Options can make money in a market that goes up and down. Some traders 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
Knowing technical analysis is key to knowing which option is the best to trade for whatever sentiment you have toward 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. Remember that price action is always the lead indicator, as all indicators lag.
Using the daily chart is the best way to find patterns. However, some traders trade on shorter time frames and 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.
Options Chain Example
This is an example of an options chain in ThinkorSwim. They also have options charts. This chain shows ITM, OTM, and ATM strike prices. Traders can also add columns such as implied volatility, intrinsic value, extrinsic value, and open interest.
Option Greeks are also important to add. The four most important are gamma, delta, theta, and vega.
Open Interest on Options Chains
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 the 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, as shown 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. Find out what you need and don’t, and keep your workspace 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.
Meanwhile, the open interest on the put side is 2,346. That tells you a lot more traders think that stock is going bearish. You may then want to reconsider and look at the charts to see what the patterns tell you.
Open Interest Example
Open Interest changes 1x a day – generally before the market opens (but some brokers do it right after the close). Either way – when the 9:30 am market opens, the OI we see that day is the OI we will have that trading day – and it won’t change again until after the options market is closed at 4 pm.
Open Interest is the total number of outstanding options held in a trade. For example – suppose 10,000 contracts were traded on Friday in $ABCD stock. We would want to know – how many were a “day trade” and had been closed by the end of the day versus how many were held into the close over the weekend?
On Monday – we can examine the OI, and if the OI is 10,000, then we know that the volume from Friday was all held into the weekend as an open position, but if the OI on Monday was 27, then we have a clue – perhaps most of the position was closed before the end of the session Friday. Only a few contracts were held over the weekend.
Implied Volatility Average
The implied Volatility Average is an important feature of the options chain; on different brokers, it can be located in different places – looking at the picture below, we can see that the implied volatility average is on the right-hand side.
The implied volatility average shows us where (in time) a market has started pricing in volatility. We often see this “pricing in” behavior in the options chain for earnings, a new product launch date, a lawsuit settlement date, or even an economic event such as CPI or FOMC. Generally speaking – the IV average should rise as we go farther out in time – and “big events” like earnings should have a higher IV average than other dates around it.
Strategies
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 many opportunities, simply pick your strategy, head to the option chain, and get to work. For example, a stock trades in a narrow range and does not move 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 don’t have much money to risk. You can trade vertical spread. You’re limiting your risk by not investing much capital into the trade.
Naked calls and puts are also there to be traded. If you see a stock ripping in either direction and want in, you can trade a call or put. The great thing about options is that one contract controls 100 shares, which you can own later. Or you can trade options like a game of hot potato. The choice is yours.
So, you get the advantage of trading 100 shares per contract without paying the price for owning 100 shares. In essence, no matter your strategy, it’s all in your options chain.
Final Thoughts
An options chain is where traders go to get important information. They allow you to place the trade you want and lay out the bid, ask, strike price, and expiration date. Even taking the time to understand an options chain is important.
If you need more help, take our options trading course.
Frequently Asked Questions
There isn't a best site for an options chain because they are found in each broker platform. They are known as an options matrix and show the available options for a given stock.
The 4 in an option stands for IV or implied volatility. This measures the rate of speed of an options contract.
Not all stocks have an options chain, however, all stocks that have options will have an options chain showing the amount of contracts that are available to trade.
