How to Read an Options Chain

Whether a trader is looking to pad a long position by writing a covered call or buy
a protective put for shares that the trader has shorted, knowing how to read an
option chain should precede either one of these potential strategies.
The option chain lists the available call and put strike prices for an underlying
security. It also lists the month of expiration for each available option. It is
important to keep in mind that one call option, is a contract that gives the holder
the option to purchase 100 shares of the underlying security. A put option, is a
contract that gives the holder the options to sell 100 shares of the underlying
security.

In the options chain above, the call options are listed on the top and the put
options on the bottom. In this instance the options listed are for Capital One
Financial common stock. The month of each expiration date are listed
horizontally across the top of the screen. As the trader clicks on the month, the
exact date of expiration appears.
Strike
The strike price, also know as the exercise price, is listed in the first column. In
the case of a call, this is the fixed price at which a trader can purchase the
underlying security. In the instance of a put, it is the fixed price at which the
option holder can sell the underlying security. The strike price is independent of
the current market price of the security.
Options that are in-the-money are highlighted. For a call option to be in the
money, the current market price must be greater than the strike price. For a put
option to be in-the-money, the current market price must be less than the strike
price.
Symbol
Just as stocks have ticker symbols, so do options. The symbol is merely a way of
identifying the strike price and month of expiration for the option in question. For
example in the case of Capital One, the May $60 call option has the ticker
COFEL.X. The symbol is listed in the second column.
Last
The third column shows the price at which the last trade for that specific option
was executed at. It can be thought of as the market price for the option, or a
quote for the option. In the case of Capital One, the May $40 put option is
trading at $0.15 per put option.
Change
The next column lists the change in price of the option. Generally, it shows the
trader by how much the option has risen or fallen since the previous market close.
Bid/Ask
The next two columns refer to an options current bid price and its current asking
price. Taken together these two numbers are more commonly known as the
bid/ask spread. If a trader were to buy an option, they would end up paying an
amount approximately equal to the listed ask price to acquire that option. If a
trader was looking to sell or write an option, the trader would receive the listed
bid price for that option.
Volume
The volume column lets the trader know how many option contracts have been
traded during the trading day.

Open Interest
The final column shows the open interest for the option. The open interest lets the
trader know how many open contracts that are in existence since the option was
open for trading. Options that have been sold or exercised to close a position, are
deducted from the open interest number.
Using An Option Chain In Practice
Once a trader is able to read the option chain, the trader is able to put this
knowledge to work. To see an option used in practice, lets take the case of the
May $50 call option for Capital One. Lets assume that the current market price
of Capital One shares is $54, but we expect shares to go higher before the option
expires on May 16. Looking at the ask price of $4.60 per contract, the trader
could expect to pay around $460 for one call option that would give them the
right to buy 100 shares of Capital One at $50.

As long as the option is in the money, it is in the traders best interest to
exercise the call option prior to expiration. Because there is a cost to the option,
$460 in this case, the trader is actually expecting shares of Capital One to go
above $55. $55 is the break-even point, because at $55, the trader is able to buy
100 shares at $50 (for a total of $5,000) using the call option and then turn around
and sell the 100 shares at $55 on per share on the open market for a total of
$5,500. After taking into account the $460 premium to purchase the option, the
trader is now roughly even.
For traders who are new to options, an option chain can seem a little bit
complicated when seen for the first time. Once the trader knows how to read an
option chain, the trader is well on their way to being able to utilize options to
hedge risk in daily trading.
So what is a Stock Option Chain?
An option chain is a list of all the stock option contracts available for a given
security (stock).
There are only 2 types of stock option contracts, puts and calls, so an option chain
is essentially a list of all the puts and calls available for the particular stock you're
looking at.
Now that wasn't so hard to understand was it? Well the confusing part comes
when you actually pull up a stock option chain.



All that easy-to-understand information suddenly gets lost in translation and
you're left looking at a table full of numbers and symbols that make absolutely no
sense at all.
How to Read a Stock Option Chain
Part of the confusion in understanding option chains is that every option chain
looks different.
If you go to Yahoo, MSN, CBOE, or your brokerage account and pull up an
option quote, you will notice that the layout of each of their option chains is
completely different.
They all essentially have the same information displayed, but look completely
different.
Let's use a snippet of the stock option chain listed above, which is a Yahoo stock
option chain of the stock symbol "MV":


Expiration Months

As you can see from the picture there are several different expiration months
listed horizontally across the top of the option chain (Aug 09, Sep 09, Dec 09,
etc.). For our example we are looking at all the call and put options that expire the
3
rd
week of December 2009.
Some traders want to stay in a trade 1 week, some want to stay in a trade 2
months, so your trading plan will dictate which month you look at.
I like to give myself plenty of time for the trade to work out so I always try to
look at options that expire 2-6 months from the current date.
Calls Options and Put Options

Each stock option chain will list out all the call options and all the put options for
the particular stock. Depending on which option chain you are looking at, the call
options may be listed above the put options or sometimes the calls and puts are
listed side-by-side.
Strike

The first column lists all of the different strike prices of the stock that you can
trade. The strike/exercise price of an option is the "price" at which the stock will
be bought or sold when the option is exercised.
Symbol

The second column lists all of the different ticker/trading symbols for each stock
option.
"MVLLE.X" is the ticker symbol for the 09 December 25 call option. The symbol
identifies 4 things: which stock this option belongs to, what the strike price is,
what month it expires in, and if it is a call or a put option.
Last

The third column lists the last price at which an option was traded (was opened or
closed). It's the price at which the transaction took place. Be aware that this
transaction could have been minutes, days, or weeks ago, and may not reflect the
current market price.
Change (Chg)

The fourth column lists the change in the options price. It shows how much the
option price has risen or fallen since the previous day's close.

Bid

The Bid price is the price that a buyer is willing to pay for that particular stock
option. It's like buying a home at an auction, you bid (offer) what you are willing
to pay for the home.
When you are selling an option contract, this is usually the price you will receive
for the stock option.
Ask
The Ask price is the price that a seller is willing to accept for that particular stock
option. This is the price the seller is "asking" for.
So when you are buying an option contract this is usually the price you will pay
for the stock option.
BE CAREFUL: remember one stock option contract controls 100 shares of
stock. So whatever Bid/Ask price you see has to be multiplied by 100. This will be
the actual cost of the contract.
Volume (Vol)
List how many stock option contracts were traded throughout the day.
Open Interest (Open Int)
This column lists the total number of option contracts still outstanding. These are
contracts that have not been exercised, closed, or expired. The higher the open
interest, the easier it will be to buy or sell the stock option because it means a
great deal of traders are trading this stock option.
Watch the video below to get instructions on how to find the stock option chain
for a stock:
http://www.learn-stock-options-trading.com/stock-option-chain.html
When you are looking at the stock option chain there are 7 factors that will affect
what stock option you choose:
1. Direction
You're either going to look at the Call option or the Put option portion of
the option chain. If your analysis tells you that the stock is going to rise
higher, you evaluate the Call option portion of the option chain. And vice
versa for Put options.
2. Duration
The next step is to figure out how long you plan on staying in the trade. If
you want to give the trade 2 months to work out, then you look for options
that are going to expire 3 months out.
Why 3 months out? It's because of the 30 day rule we discussed in the
strike price lesson.
3. At-the-Money (ATM)
This rule is simple. You're going to pick the At-the-Money (ATM) stock
option. This rule was also covered in the strike price lesson.
4. Can you afford the option
If you can't afford the ATM option, then you can look for a closer
expiration month or move on and find a trade on a stock where you can
afford the stock options.
5. Open Interest
Only buy stock options with an open interest of 100 or higher. This
ensures that there are enough people trading the option to make it worth
your time. The more people trading the stock option, the easier it will be
to buy and sell the option.
6. Comparison Shopping
Here you simply look for the best value. Check out the price of stock
options for other expiration months and see if you can find a good deal.
Maybe you will find a stock option that expires 2 months later, but only
costs a few dollars more.
7. and the Bid/Ask spread
You want to make sure the Bid/Ask spread is small (for ex. $4/4.2). If it's
too wide ($4/$5) then it may mean that this stock option is not in much
demand. Also keep in mind that you have to multiply the cost by 100. So
$4/.2 is a difference of $20 and $4/$5 is a difference of $100.

The Options Chain Sheet
Options are most frequently quoted in a list format called a chain sheet. Each
chain sheet has several components and although they are not complicated but it
would be helpful to walk through each section so you understand what to look for
when evaluating an option trade.
[VIDEO] The Options Chain Sheet
http://www.learningmarkets.com/the-options-chain-sheet/
In this article, we will be using a typical chain sheet for the stock Microsoft Corp
(MSFT) for demonstration. Keep in mind that every online broker uses a slightly
different version of a chain sheet. However, they are similar enough that it is
usually not a challenge for a trader to shift from one version to another.
Each element of the chain sheet are described below. The numbers reference each
elements position on the image below.

The Options Chain Sheet
Calls and puts (1)
Chain sheets are arranged with calls on the left hand side of the list of options and
puts on the right hand side. In some chain sheet versions, the calls and puts are in
a single list but the format below is more common.
Strike prices (2)
The available strike prices are listed down the center of the chain sheet. There is a
call and a put contract that correspond to each strike price. If you need some help
understanding what a call or put is, click here first.
Bid and ask (3)
Each call and put at every strike price has a listed bid (sell price) and ask (buy
price). These prices are quoted per share, which means that you need to multiply
it by the number of shares per contract, or 100. That will tell you how much a
single contract will cost to buy, or is worth to sell.
Open interest (4)
The number of contracts of a call or put at a specific strike price currently held by
other investors.
Volume (5)
The number of contracts of a call or put at a specific strike price bought and sold
today.
Extra info (6)
Depending on your broker, there may be several other columns for each option
contract. This extra information may include last trade price, implied volatility or
some of the option Greeks. The most critical information, however, is contained
in items 1-5 of the chain sheet.

Options chains

What are options - and why might investors consider adding them to their
portfolio mix? In this back-to-basics series, TradeKings Brian Overby
explains options from scratch, covering opportunities to risks. This post
continues a discussion on options quotes, explaining options chains.

Welcome back-to-school, investors! Recently TradeKing has attracted literally
thousands of new investors, many of whom are brand-new to the markets and
curious about options. This series is our attempt to get them started right.

So far weve defined options, both calls and puts, explained what sports and
movie contracts have in common with investment options, and showed how an
option contracts terms are spelled out in its name. Today well discuss a related
concept, how to get options quotes using options chains.
As I explained last time, options quotes encompasses a bigger concept than a
simple stock quote does. IBM may have one major quote, divided into bid and
ask prices, for its stock, but it may have dozens of options quotes with IBM as the
underlying stock. You can access this list, or chain of options quotes at
TradeKing at Quotes + Research > Option Chains. (Dont forget to login first.)

In the screenshot below, youll see IBMs option chain.

First check out the search criteria at top. Because I knew my underlying ticker
symbol (IBM), I plugged it straight into the search box. But if you dont, you can
always start at Quotes + Research > Quotes + News + Research, and use the
Symbol Lookup text link to the right of the search box.
I used the default search criteria: I wanted to see near-the-money option contracts
of both kinds (calls and puts), and I limited my search to the closest expiration
month in this case, Nov09.
Whats near-the-money mean? Well, to explain that we should first look at the
IBM stock quote in the top center of our options chains. As of this writing, IBM
was trading at 123.06. Some strike prices for options already have value, based on
this underlying stock quote for example, the 110 call gives you the right to buy
IBM stock for $110, when the market price is $123. (To find the 110 call, check
out the gray stripe at center that lists the strike prices on IBM in this chain.
Youll see the 110 strike is right at top, with calls to the left and puts to the right.)
Similarly, the 135 put gives you the right to sell IBM at $135; compared to a
market price of $123, the put owner is sitting pretty.
Both the call and the put I mentioned above are in-the-money based on the
current price of the underlying, they have intrinsic value that could be
immediately turned into cash, if the option holder chose to. That is, that put owner
could immediately exercise and sell IBM for $135, even though everyone else has
to sell IBM at $123. Theres $12 of intrinsic, in-the-money value in this put.

On the flip side, some options are out-of-the-money. It does me no good right
now to be allowed to buy IBM for $135, if I can buy at the market price for
cheaper, $123. Similarly, nobody gets too jazzed about being allowed to sell IBM
for $110 if the market can fetch me a higher price, $123. These options are
therefore out-of-the-money they currently have no intrinsic value.
However, options have two types of value to consider. While only some of them
have intrinsic value they could be immediately converted into cash, based on
the current underlying price they all also have time value. Simply put, we have
no idea whatll happen to IBMs stock price between now and 11/20, when the
Nov IBM options will expire. During those 33 days, many of these options could
go in-the-money (ITM) or most out-of-the-money (OTM), or swing back and
forth between the two. That X-factor is reflected in an options time value.

You can see intrinsic and time values reflected in any options price. Check out
the 135 call, the most out-of-the-money call in this chain. See the Bid and
Ask columns to the left of the gray Strike column? As with stocks, the ask is
the price you can buy at in this case, 0.25 and the bid is the price you can sell
at 0.20. Even though this option contract has zero intrinsic value now, it still has
33 days until expiration. In other words, its not worthless its still got potential
to move, which translates into time value.
Similarly, look at the very in-the-money (or ITM) 135 put, at bottom on the right.
You can buy this put now for $12.80 (the ask), which gets you $12 of current
intrinsic value. The other $0.80 can be chalked up to time value.
So far, weve talked about some of the columns in an options chain, but not all.
What is open interest, delta or IV? And whats with the funny options
symbols like IBM.KB? Ill unpack those concepts in my next post. See you then!

Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com