Want to know which options to trade? Well, to know what’s out there (expiration period and strike prices) then you need to look at an options chain.
An options chain is a list of all of the available options for any given security. It’s where you’ll find quotes for puts and calls, as well as which strikes are traded and their expiration period. Some professionals call the options chain the options matrix because it resembles a matrix you’d see in mathematics. When assessing an options chain, analysts and traders usually focus on a few columns, including the “bid”, “ask”, and “last price” columns to get a better sense of current market conditions.
To become a market expert and make more money trading options, you’ll need to know how to read an options chain. Read on to learn everything you need to know, including an options chain example.
Getting Familiar With The Options Chain
Now, an options chain is found on most brokerage platforms. It tells us what is available for stocks and ETFs that are optionable. And depending on which broker you use, you can customize settings to fit your trading needs.
Check out the options chain example below.
Options Chain Example:
Source: think or swim
The image above is an options chain for the SPDR S&P 500 ETF (SPY). Pay attention to the left-hand side, as it shows all the different expiration periods. Some ETFs like SPY have weekly, monthly and quarterly contracts.
Opening an Options Chain
Reading an options chain is less complicated than it sounds. There are a few things you should look at every time you open up an options chain.
When you open the options chain further you’re introduced to a lot more valuable information. Let’s start from left to right.
Looking at the 1 April 2019 options first we see volume, open interest, the bid/ask spread for both calls and puts. Furthermore, if you look at the 279 calls strike you’ll see that there have been 3,340 contracts traded (volume) with 2,264 contracts of open interest (outstanding contracts).
As a rule of thumb, you want to trade options that have some volume and open interest. The more traders in a particular options strike, the better the chances you’ll have to get in and out of your trade without too much slippage. That said, the bid/ask spread for the $279 calls are $2.12 by $2.15. Only $0.03 separate the bid from the ask, making this a competitive spread.
If you shift over to the right-hand side you’ll get the same information but for puts instead. If you look at the options that expire on 12 April 2019, you’ll see that they have the same strike prices as the April 1 options. That said, you can expand the options chain to include more strikes if you wanted too.
For the most part, as a rule of thumb, the farther that you go out in time on an options chain, the more expensive options will become.
Options Chain Layout: Options Greeks
There are several ways you can optimize an options chain dependent on your broker and platform. For example, the option chain above focuses on the options greeks. That said, we’ll move from left to right again and go over the information. The first option greek is Delta. The Delta of an option tells you how much the price of an option will change given a $1 move in the underlying. For example, the 279 call has a delta of $0.51. If the SPY were to gain 1 point the value of the option would rise by $0.51. On the other hand, if the SPY were to drop 1 point, then the value of those calls would decrease by $0.51.
The Gamma tells us how much change the Delta will change with every one point move in the underlying. For example, if the SPY were to move from 279 to 280, then the Delta of the 279 calls will move from $0.51 to $0.58.
The Theta tells us how much an option will depreciate for every day that passes. One thing to keep in mind is known of these Greeks are constant. That said, Theta accelerates as an option approaches expiration. Furthermore, on this day, the 279 calls will lose $0.14 in time decay.
Now, the Vega tells us how much an option will gain (or lose) for every percentage move change in implied volatility. For example, If implied volatility rises by 1% the 279 calls will gain $0.16.
Options Chain Variations
Furthermore, you can set up your options chain to look at complex strategies like spreads and straddles, like the example above. For example, the 281 straddle above is 5.55 bid by 5.60 ask. Also, the options chain above also displays the implied vol.
You can even customize your options chain to whatever features you want. Some favorite features include” last price, bid/ask, open interest volume, vega, and implied volatility.
It takes time to get familiar with an options chain, but its worth it if you plan on trading more options. To learn more about how to become a better options trader and start making more money with trading options, pick up a free download of our e-book book for a limited time, Option Profit Accelerator.