Dear Reader,

At Patterns & Profits, we try to serve option traders at any point in their trading journey.

Whether you’ve been trading for years and are looking for advanced strategies to help improve your skills, or you’ve never bought a single share of stock in your life, I want to make sure that you can follow along.

Sometimes, that means getting back to basics.

And there’s nothing more basic than what we’re going to talk about today – how to read an option chain.

Let’s get into it.

At First Glance: It’s a Lot, But Don’t Worry

An option chain is the table full of data that tells you all about the options available for a particular security. It gives you more than just the option price; you’ll also see things like how many options were traded that day (volume), how many are still open since trading began (open interest), and sometimes even columns with info on the “Greeks,” which are factors that can affect the price of options and predict potential price changes.

When you first look at an option chain, all the data, symbols, and column headings might feel overwhelming. But take a breath and relax – you’ll understand what it all means and how to use this info to make smart trading decisions by the time we’re done.

Now, before we begin, I do want to note that not all option chains look the same across different brokerage sites. But don’t worry, the basics are the same, and that’s where we’ll start.

The Basics of an Option Chain

First things first, there are only two types of options: Calls and puts. Most tables will display these side by side, but sometimes they’re stacked with calls on top and puts below (like on Yahoo Finance).

For our purposes, let’s just take a look at call options (the table for puts includes the same columns)…

Here’s what you’ll typically see on an option chain, starting from the left column:

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  • Option Symbol (OpSym): The ticker symbol for the option, which includes:

    • Underlying Ticker: The ticker of the underlying stock.

    • Expiration Date: When the option expires.

    • Strike Price: The price at which you can buy (Call) or sell (Put) the underlying asset.

  • Bid and Ask Prices: The bid is what buyers are willing to pay, and the ask is what sellers want.

  • Volume: How many options were traded that day.

  • Open Interest (OI): The total number of open contracts that exist since trading started.

If you’re using a real-time quote service, you might also see the last traded price, price change, and percentage change.

Advanced Data: The Greeks

Some platforms might offer more advanced data, like the “Greeks.” Here’s what they mean:

  • Delta: Measures how much the option’s price will change with a $1 move in the underlying asset.

  • Gamma: The rate of change for Delta. Think of it as Delta’s acceleration.

  • Vega: Indicates how sensitive the option’s price is to changes in the asset’s volatility.

  • Theta: Represents time decay—how much value an option loses as it gets closer to expiration.

How to Navigate an Option Chain

When you open an option chain, start by choosing the expiration date you’re interested in. Then, focus on either the calls or puts section. Check the strike prices to see the ones that interest you – and note that sometimes, you might need to adjust the settings to see more strikes.

Look at volume and open interest to gauge how much activity there is. A common guideline is to look for at least 100 contracts in Open Interest, but the real test of liquidity is how close the bid and ask prices are. If the spread is tight (less than 1% of the security’s price), you’ve got good liquidity, which means getting in and out of trades will be easier.

6 Key Points to Review

Here’s a quick checklist for reading an option chain:

  1. Option Symbol (OpSym): The ticker symbol for the option, which includes the ticker of the underlying stock, the expiration date, the type of option (call or put) and the strike price of the option.

  2. Strike Price: Make sure the strike you’re interested in is listed.

  3. Bid and Ask: This is the current market quote for the option.Generally speaking, the spread between the bid and the ask can tell you a lot about liquidity – and your ability to get in and out at the price you want.

  4. Implied Volatility (IV): This can help you gauge if an option is fairly priced, cheap, or overpriced.

  5. Volume: The number of contracts traded that day.

  6. Open Interest (OI): The total number of open contracts.

And if your platform offers it, consider adding the Greeks to your table – they provide valuable insights into price movement, time decay, and volatility.

This is just a starting point. As you get more comfortable with option chains, you’ll develop your own preferences on what to focus on and what to skip. Keep learning, and enjoy the process – it’s all part of becoming a better options trader.

Good Trading,

Signature

Tom Gentile
America’s Pattern Trader