By Ryan Watkins, Lead Coach
Options can be complex, but they can also be simple if you want them to be. In our OptionsAbilities Course we teach some very simple strategies. One of the analysis tools every option trader must know how to use is an Option Chain. In the first of a two-part series, I’m going to run you through an Option Chain and break it down into “digestible” parts.
What is an Option Chain?
An Option Chain lets an options trader select the correct option to place a trade on. There are several parts to an Option Chain, let’s take to look at the different parts of a standard option chain.
Expiration Selection Day/Month/Year
Below is an example of Microsoft (MSFT.) The last price traded was $218.59. In this part of an Option Chain, we would select the expiration date we are interested in trading.
Let’s use the 15 Jan 21, that is, January 15th, 2021 expiration date. It has 28 days left until that options contract will expire. That is shown as (28.) The “Chain” is displayed like this:
The Middle (Strikes)
The middle part of the Option Chain has three things that are important to an option trader:
First, the number of strike prices that will be displayed on the chain. This can be set to your personal choice. Here, we have it set to 14. That means the Option Chain will show the nearest 14 strike prices, seven above and seven below.
Second, shows the expiration date of each option. This will match what we have already selected.
Third, the strike price of each option. This is one of the more important factors you will need to use. The strike price is the location where you place the trade.
The Left Side (Calls)
The left side of the Option Chain is where the Calls are located:
Should you want to buy or sell a call, this is where you would do that. The Call side has several columns that can be customized. Here we have selected Volume, Open Interest, Bid & Ask. Let us look at an example.
Let’s say you want to Buy a Call Option on MSFT at $200 (highlighted in red.)
You can see the Volume at this time was 492 contracts traded. Open Interest was 24,710 contracts. The bid price (this is where you would sell) is $19.55 and the Ask Price (This is where you buy) is $20.80. The order would look like this:
So, buying 1 Call contract of MSFT (100shares) would cost us $2,080.
The Right Side (Puts)
The right side of the Option Chain is where the Puts are located:
Should you want to buy or sell a put option, this is where you would do that. The Put side has several columns that can be customized as well. Here we have selected our standard Volume, Open Interest, Bid & Ask. Let us look at a Put Option example.
Let us say you want to Buy a Put Option on MSFT at $210 (highlighted in red.)
You can see the Volume at this time was 1,057 contracts traded. Open Interest was 22,996 contracts. The bid price (this is where we would sell) is $3.10 and the Ask Price (This is where we buy) is $3.60. The order would look like this:
So, buying 1 Put contract of MSFT (100shares) would cost us $360 with a maximum profit of $20,640.
In option trading there is a tern used called “Moneyness”. Moneyness is a way to identify the value of a particular option. There are three types, In the Money (ITM), At The Money (ATM) & Out Of The Money (OTM). Let’s look at where those are in the Option Chain.
Let’s first look for where At the Money (ATM) is on the Option chain. ATM is when an option is at or close to the current stock price as shown here at $215-$220. Remember, the last price traded was $218.59.
Next, let us look for where Out of the Money (OTM) is on the Option chain. OTM is when an option is far away from current price. Calls are Out of the Money (OTM) when their strike price is above the market price of the underlying asset. Puts are Out of the Money (OTM) when their strike price is below the market price of the underlying asset.
In this Option Chain, those are displayed with a white background. For example, if we are buying a call OTM with a strike price of $230 and current price is $218, then we can say the strike price is $12 OTM ($230 – $218.)
Finally, let us look for where In the Money (ITM) is on the Option chain. A call option is In the Money (ITM) when the strike price is below the spot price. A put option is In the Money (ITM) when the strike price is above the spot price. In this Option Chain, those are displayed with a yellow background.
Here is another way of looking at it:
I hope you found that useful. Stay tuned for part two next month.