Summary
An option chain is a chart with in-depth information about all available stock option contracts. In this article, we provide a brief guideline on how to understand an option chart and the terms that you should be aware of while looking at an option chain, such as volume, symbol, last price, and strike.
An option chain is a list of all the option contracts that are available. This includes both puts and calls for an underlying security. Moreover, it also includes the strike prices and the pricing information for any underlying asset within a fixed expiration period.
Understanding an option chain
An option chain is a visual representation that can help you simplify your investments in options trading. As we know, Options are contractual agreements that confer the right to either purchase (in the case of call options) or sell (in the case of put options) a security at a predetermined price and is valid until a specified expiration date.
With the option chain, you get a visual tool that has all available option contracts including both put and call options associated with an underlying security. This also shows all the important data, including put and call options, strike prices, and pricing details, for any underlying asset within a designated expiration timeframe. While this may seem like a connected chain of information, it may also be called an option matrix.
(Source: Robinhood.com)
The image above serves as an example of option chain and shows what is available at what price.
Things to know while looking at an options chain
Here are a few things that you need to know about when you look at an option chain:
Symbol: Symbols, or the OPRA (Options Price Reporting Authority) code are associated with every option, just like its underlying stock. This is also known as. This might look a little cryptic, but the one long symbol generally includes all the necessary option information.
Volume: The number of contracts traded for a particular option in the most recent trading session is considered the volume.
Put and call: The prices of call options and put options are listed separately in an option chain. While you can find calls listed on the left side, puts stay on the right. However, you should know that some brokers might display them separately, which means separate pages for call and put options.
Strike: Strike is also known as exercise price or strike price. It is the obligatory price that the seller decided to buy at (in case of a put) or sell at (when it is a call option) at any time across the expiration date of an option.
Last price: The last price is the most recently posted trade on an option.
Closing price: This is the final price at which the stock or option trades during regular trading hours.
Change: You will find the variance between the last price or the most recent one at which a particular option was last traded and the prior day's closing price in the change column. It is displayed in terms of dollar or percentage.
Bid and ask: Bid and ask columns reflect the agreed amount at which a trade is finalised between the buyers and sellers. While the bid price denotes the highest price that someone wants to pay for an option, the asking price is the lowest at which an individual wants to sell an option.
Open interest: The number of open contracts for a specific option is showed by Open interest. These contracts are yet to be closed/exercised and their settlement into the underlying stock/instrument is also pending.
Even though everything may not be available on your option chain, you must still do your research before jumping in. This will give you the detailed know-how on call and put options. Without research, you will not be able to understand and prices the information on an option change.
Is there any risk related to trading options?
As mentioned before, options trading is a risk-intensive endeavour. You need to understand complex options strategies and invest enough time to understand the terms as well as the pros and cons.
A few more things that you need to know
In-The-Money or ITM is considered when the call option's strike price is lower than the present market value. The put option in ITM is when the current market price is lower than the stock price.
At-The-Money or ATM is a situation where the strike price of a put/call option is the same as the current price of an underlying asset.
Over-The-Money or OTM is when the strike price is above the current market price of an underlying asset. On the other hand, the put option is said to be at OTM if the strike price is less than the current market price of an underlying asset.
Implied Volatility or IV reflects the price swing.
Conclusion
Consider your investment goals and risks before trading options. You might also need to go through the list of risks before deciding. Doing your research will give you a better chance at Futures and Options trading.