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A Newbie's Guide to Reading an Options Chain

Options have a language all of their own and when you begin to trade options, the information may seem overwhelming. When you look at an options chart, it first seems like rows of random numbers, but options chain charts give you valuable information about the security today and where it might be going in the future. Not all public stocks have options, but, for those that do, the information is presented in real time and in a consistent order. Learning to understand the language of option chains will help you become a more informed trader. It can make all the difference between making or losing money in the options markets.

Finding Options Information

Real time option chains can be found on most of the financial websites online with stock prices. These include Yahoo Finance, The Wall Street Journal Online, and online trading sites, such as OptionsXpress and TD Ameritrade. On most sites, if you find the chart of the underlying stock, there will be a link to the related options chains.

What the Options Chain Tells You

Options chains are listed in two sections: calls and puts. A call option gives you the right (but not the obligation) to purchase 100 shares of the stock at a certain price up to a certain date. A put option also gives you the right (and again, not the obligation) to sell 100 shares at a certain price up to a certain date. Call options are always listed first.

Options have various expiry dates. For example, you could buy a call option on a stock expiring in April, or another expiring in July. Options with less than 30 days to their expiry date will start losing value quickly, as there is less time to execute them. The order of columns in an option chain is: strike, symbol, last, change, bid, ask, volume and open interest. (For related reading, see: Options Pricing: Intrinsic Value and Time Value.)

The strike price is the price at which you can buy (with a call) or sell (with a put). Call options with higher strike prices are almost always less expensive than lower ones. The reverse is true for put options—low strike prices mean higher option prices. With options, the market price must cross over the strike price to be executable. For example, if a stock is currently trading at $30.00 a share and you buy a call option for $45, the option is not worth anything until the market price crosses above $45.

Each option contract has its own symbol, just like the underlying stock does. Options contracts on the same stock with different expiry dates have different options symbols. 

The last price is the most recent posted trade and the change column shows how much the last trade varied from the previous day's closing price. Bid and ask show the prices buyers and sellers, respectively, are willing to trade at right now. Think of options (just like stocks) as big online auctions. Buyers are only willing to pay so much, and the seller is only willing to accept so much. Negotiating happens at both ends until the bid and ask prices start coming closer together. Finally, either the buyer will take the offered price or the seller will accept the buyer's bid and a transaction will occur. With some options that do not trade very often, you may find the bid and ask prices very far apart. Buying an option like this can be a big risk, especially if you are a new options trader. (For related reading, see: How to Calculate the Bid-Ask Spread.)

The volume column shows how many options traded today, while the open Interest column shows how many options are outstanding.

In or Out of the Money Options

Both call and put options can be either in or out of the money, and this information can be critical in making your decision about which option to invest in. In the money options have already crossed over the current market price and have instant underlying value. For example, if you buy a call option with a current strike price of $35 and the market price is $37.50, the option already has an intrinsic value of $2.50. You could buy it and immediately sell it for a profit. That guaranteed profit is already built into the price of the option and in the money options are always far more expensive than out of the money ones. If an option is out of the money, it means the strike price hasn't yet crossed the market price. You are wagering the stock will go up in price (for a call) or down in price (for a put) before the option expires. If the market price doesn't move in the direction you wanted, the option expires worthless.

The Bottom Line

Knowing how to read options chains is an integral skill to master because it can help you make better investing decisions and come out on the winning side more often.



 

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