How to Read an Option Chain

March 18, 2016 Printer Friendly Printer Friendly

An options chain is a table showing current bid and ask prices on options at different strike prices and expiration dates for a given optionable stock. You can find an online option chain through your broker’s site, where you’ll see options pricing changing in real time. Let’s walk through an example using Facebook (FB)’s option chain.

First, to populate the option chain, you’ll want to select expiration dates from a menu like this:

expiration date

As you can see in the above image, FB has weekly expiration dates, but some stocks only offer monthly expiration dates.

Once you have selected your expiration dates, the table will show the calls and puts available at each strike price. Here you can see calls on the left and puts on the right, with the strike price in the blue column in the center.

options chain

The table columns are:

Bid: A buyer’s bid for the options contract at that strike price.

Ask: A seller’s asking price for the options contract at that strike price. As you can see above, the spread between the bid and the ask may only be a few cents.

Last: The last price an option contract sold for at that strike price.

Change: The change between yesterday’s close price and the current price. This will let you know if the prices are going up or down.

Volume: The number of contracts exchanged so far on the current day.

OI (Open Interest): The number of bid and asks that are currently unfulfilled. This will give you a sense of the liquidity of the contract.

Typically you would be shopping for either a call or a put contract, not both at the same time, so you can opt to see only puts or calls. In the screenshot below, only puts are shown.

put options chain

Notice that some rows are in light blue while others are in white. Those in white represent the strike prices that are “out of the money” (OTM)—in the case of put options, that means below the current price of the underlying asset. The rows in light blue represent strike prices “in the money,” (ITM) or above the current stock price. Notice that OTM options are cheaper, because you are buying a contract that is less likely to be in the money and therefore you will pay less to buy it—or if you are selling it, you will get less.

Remember, put sellers are either betting that the option will expire worthless so they can simply collect the premium without having to buy the stock, or they are attempting to buy the stock at a lower price than the current market price if the contract should execute. The price of a put increases sharply as the strike price goes higher above the current price to compensate for the additional likelihood the contract will execute, and therefore the put seller’s increased cost risk (a higher likelihood of being obligated to buy the stock at the strike price). Meanwhile, put buyers are betting that the stock price will decrease so that they can sell the stock at a higher price than the market price at options expiration and make the spread between the market price and the strike price.

Now let’s look at an option chain for calls only:

call options chain

As with the puts chain, you’ll see that there are white and blue rows, but they are flipped. In this case, the light blue rows are on top, indicating that the “in the money” prices are below the current stock price. Likewise, OTM prices are above the current stock price. Once again, ITM options are more expensive than OTM options.

Call sellers (who collect premium) are either betting that the underlying stock will not appreciate and the call will expire worthless, i.e., the price of the stock will not rise above the strike price so they can collect premium without having to to sell the underlying asset below its market price. They also may feel that above the strike price, the stock is not a great buy and therefore use the call as a vehicle to get paid to exit a stock at their target price. Call buyers are betting the stock price will go higher by reserving the right to buy at a below-market purchase price (the strike price) if the stock price were to go higher.