- 1 What is an Options Chain?
- 2 How to Read Options Chain?
- 2.1 Calls and Puts
- 2.2 In-The-Money (ITM)
- 2.3 At-The-Money (ATM)
- 2.4 Over-The-Money (OTM)
- 2.5 Change
- 2.6 Volume (Vol)
- 2.7 Open Interest
- 2.8 The Strike Price
- 2.9 Options Symbol
- 2.10 Last Done Price
- 2.11 Direction
- 2.12 Bid-Ask Spread
- 3 Additional Data to be Aware of
- 4 Things to Remember When Reading an Option Chain
- 5 Conclusion
- 6 FAQ
Options trading is one of the most profitable trading approaches. But to be a successful options trader, you’ll need to evaluate the market trends. There are several indicators available to analyze the values. So, you need to know how to read Options chain to make full use of them.
The best approach to reading Options chain is to understand all the components you’ll see in an options table. This way, you can understand what the chart shows you and make informed decisions. In this article, we will discuss all the options chart components.
What is an Options Chain?
So, the first thing to know about is the basic definition of an options chain. The options chain is explained a simply listing all the option contracts. There are two main sections of the options chain. One is a call, and another is known as the put.
For given security, the options chain lists all the option contracts. But many option traders mostly focus on the bid price, net changes, asking price, and the last price. These sections are mentioned in different columns in options charts. Thus, traders can use the options trading chart to assess the current market conditions.
Another name for the options chain is the options matrix. The options matrix indicates the price movement of different stocks. By reading options tables, traders can depict the price movements and their directions.
Additionally, an options matrix is helpful for traders to analyze and identify the liquidity of a stock. Options reading enables them to determine when a low or high liquidity level appears. As a result, traders can evaluate the liquidity and depth of a specific strike.
For a given underlying security and expiration month, the options chain displays the available call put chart. The interface may alter slightly depending on whatever online brokerage service you choose. But the layout and information offered should be relatively similar in general.
How to Read Options Chain?
The best way to understand the options chain is by knowing all its components. You will find almost all the components in the options table.
So, let’s learn about them briefly below.
Calls and Puts
The first component you need to understand to read the options table is the option chain calls and puts. Call option charts are normally listed on the left, whereas puts are usually posted on the right.
To distinguish them from out-of-the-money options, in-the-money options are typically underlined. If you want to trade between at-the-money or near-the-money options, you can do so on either side of the highlighting ‘border.’
If the strike price of a call option is less than the underlying asset’s current market rate, it is an ITM.
Again, if the strike price of a put option is higher than the underlying asset’s current market price, it is also ITM.
An equal price to the market value for a call or put indicates an ATM.
If the strike price of a call option is higher than the underlying asset’s current market price, the option is out-of-the-money.
Similarly, if the strike price of a put option is less than the underlying asset’s current market price, the option is out-of-the-money.
This column shows how much the option’s price has changed since its closing the previous day. For instance, you can determine how much the price has deteriorated by reading option chain data. You will be able to conclude the exact price increase or decrease from the change.
Volume is the total contract number you can trade for a particular option during a typical trading day. The larger the trading volume, the more “liquid” the option contract becomes.
Volume might not be the most comprehensive metric of option liquidity because every trading day delivers a fresh daily volume. Furthermore, acquiring historical daily volume data for options is even more difficult than stocks.
The number of outstanding options of a certain option that have not yet been closed out or exercised is referred to as the open interest of an option contract.
If a call option’s open interest is 1,000, it means 1,000 active options haven’t been exercised or sold yet. Because an option is essentially a contract, new ones can be produced every day.
Nonetheless, the current open interest value helps investors measure the interest level in a certain option contract. It’s a yearly figure rather than a daily figure like volume. The option contract is deemed more liquid if the open interest is high.
The Strike Price
You will find the strike price range down the centre of the table. These strike prices are available for the expiration month of each strike. The striking price intervals change depending on the underlying price.
Intervals are 2.5 points for lower-priced equities (often $25 or less). Strike price intervals for higher-priced equities are 5 points (or 10 points for really costly stocks priced at $200 or above).
Options symbols are specific to each option contract. They represent option type, the underlying asset, and the expiration month. However, they are rarely utilized nowadays.
Because of modern computer technology, this information is frequently available to traders in a user-friendly interface. While you can enter the symbol directly while placing orders, it’s better to use the options chain interface to choose the desired alternatives and reduce human mistakes.
Last Done Price
The most recently traded price for a certain option is reflected in the last done price. The most recent transaction could have occurred hours or days earlier.
Especially for low volatility contracts, you should look at the bid-ask price instead of the last done price to have a clearer overview of the current market price of the option you want to trade.
One of the most basic things about reading options is understanding the direction. You should ideally follow the call or put the options area of the chart.
If you analyze that the stock price will go high, you should evaluate the call option. In contrast, if you predict an opposite trend, you should look more into the put options.
The bid and ask indicate the rate buyers want to pay and what sellers expect to receive for a specific option. The bid and ask gap is known as the bid-ask spread, and the option’s liquidity determines its size.
The bid-ask spread is typically greater when open interest is low. Additionally, near-the-money options typically have higher open interest, resulting in improved liquidity and smaller bid-ask spreads.
Additional Data to be Aware of
Apart from the exact components, you will find some more things to understand in an options table. This additional information isn’t directly available. Yet, knowing about them will help you read stock options quotes.
Delta: It represents the Options price sensitivity to the price movements.
Gamma: The Delta of an Option constantly changes. So, Gamma helps to measure the change in Delta for better understanding.
Theta: The closer an option gets to its expiry, the less its value becomes. This is known as time decay. Theta allows traders to measure this value.
Vega: Finally, Vega is the measurement of determining the price changes during volatility.
Things to Remember When Reading an Option Chain
When reading stock option chains and trading options, there are a couple of factors to consider. Whether an option contract is in-the-money or out-of-the-money is one of the essential considerations.
Options are considered in-the-money if they can be exercised immediately after purchase. On the contrary, it will be out-of-the-money if they must wait for a change in the stock price before they can be exercised.
Another thing to remember is that, while options contracts normally represent 100 shares of the underlying stock, options chains only indicate values for one. As a result, when purchasing options, expect to spend 100 times the market price.
Stock options may appear scary to traders who are used to trading stocks. But they provide leverage and security that stock trading alone cannot provide.
Reading options chain is one of the most important abilities for successful options trading. It provides pricing information for all feasible options for each stock. It’s also helpful in comparing options and making quick choices about whether or not to open options positions.
How Do You Read an Options Chain?
Reading an option chain is simple and beneficial if you understand all the components clearly. So, the best approach to reading an option chain is knowing about all its components in an options table.
What is PCR in Option Chain?
The put-call ratio (PCR) is a popular metric for assessing the options market's sentiment. As a contrarian indicator, the ratio focuses on option building. It helps traders determine whether a recent market collapse or increase is significant and if the time has arrived to make a counter called.
How Do You Know If a Stock is Bullish or Bearish?
When the exchange rate of a currency pair rises overall and forms higher highs and lows, it is said to be in a bullish market. On the other hand, a bearish market is marked by lower ups and downs and a general decline in the exchange rate.
Which is the Best Indicator for Options Trading?
For high-frequency option traders wanting to bet on intraday movements, the Intraday Momentum Index is a good technical indicator. It combines intraday candlesticks and RSI ideas, resulting in an appropriate range (similar to RSI) for intraday trading by signaling overbought and oversold levels.
How Do You Predict Stock Options?
PCR is one of the best methods to predict stock options. You can easily compute the value of PCR by dividing the put options by the call options of trade.