An option chain is a matrix listing for a single underlying security that shows all of the available option contracts.
Essentially, an option chain is a list of all the call and put options available for trading a particular underlying security, such as a stock. It is crucial that investors are able to read option chains so that they can make informed decisions when trading options.
Online brokers and stock trading platforms display option quotes row by row within the option chain by using real-time or delayed data.
The best way to understand how to read an option chain is actually to look at one and learn what the language means.
Let’s look below at an option chain for Microsoft (NASDAQ: MSFT).
This picture only shows shaded call options. If you were to scroll down farther on this option chain, then you would find put options as well. The options are shaded because that indicates that these options are “in-the-money.” Options that aren’t shaded indicate that they are “out-of-the-money.” This chain deals with options that expire in a day. Now let’s look at this chain one column at a time.
The first column lists the different trading symbols for each call option. Each symbol represents which stock this option belongs to, when the option expires, if it is a call or put option and the strike price. Let’s look at the symbol, “MSFT200417C00135000.” “MSFT” means that the underlying stock of this option is Microsoft. “200417” means that this option is expiring on April 17, 2020. “C” indicates it is a call option. “00135000” indicates that the strike price is $135.
The second column indicates the time at which the last trade of the particular option took place.
The third column is the strike price. That is the price at which the owner of the call option has the right to buy the underlying security until the expiration date.
The fourth column is the last price at which the option was traded. This price may not reflect the current market price, so the buyer must beware.
The fifth column is the bid price. That is the price at which the option buyer is willing to pay for the option.
The sixth column is the ask price. That is the price at which the option seller is willing to sell the option.
Also keep in mind one option contract equals 100 shares of stock. Whatever the bid or ask price is should be multiplied by 100 to get the actual price of the option contract.
The seventh column labeled “change” is the difference between the current price of the option and the previous day’s closing price of the option.
The eighth column is the percentage change of the current price minus the previous day’s closing price.
The ninth column is the volume of the contract. That is the number of contracts of that particular option that were traded on that day.
The 10th column is open interest. Open interest is the total number of contracts that are still outstanding. This means that these contracts have been traded but have yet to be exercised, closed, or expired.
The 11th column is the implied volatility. Implied volatility is used to indicate how volatile a stock’s price may be in the future. High implied volatility means that the market predicts that the stock will have large price swings in either direction. Low implied volatility means that the market predicts that the stock will not swing in either direction significantly.
Implied volatility is important in the pricing of option contracts. Higher implied volatility indicates a higher premium price, whereas a lower implied volatility indicates a lower premium price.
After having read this article, one should be feel prepared to read an option chain and understand what each column means. This is a critical skill needed in order to become a successful options trader.