How Professional Traders Use an Options Chain

Founder and CEO Bernie Schaeffer explains straddles and strangles

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    If you’ve ever looked at the options chain, you probably noticed how complicated it seems. These numbers and letters make options look more like an algebra class than a financial product. However, like stocks, an option is a financial product that fluctuates based on an underlying asset. The options chain represents these factors. Understanding it can be the difference in using options as a speculative tool, as a hedge, or even creating their financial strategies using a combination of ETFs, options, and other assets.

    Given the ability for investors to trade options online, more investors are becoming savvier at the options table. In this post, we want to provide an overview of how options chains work and how they are priced, on top of showing examples of how these values change as expiration draws closer and volatility adjusts.

    Understanding the Options Chain

    Options chains are the backbone of options trading. They are used to display all available options for a given security and provide investors with pricing data and information about types (call/put), strike prices, expiration dates, bid/ask prices, and open interest.

    Options traders and investors widely use options chains to visualize an options contract’s risk and reward potential. An options chain consists of multiple agreements with special strike prices and expiration dates. There is both a call and put option available with the same underlying asset, strike price, and expiration date in most cases.

    The most common use of an options chain is when it is used to compare potential profits across different positions. For example, the strikes at which profits would equal $100 are the most common positions to view on a comparison options chain. This position can be seen on any option chart, including single stock, index, or ETF.

    Components of the Options Chain

    For an options trader, understanding an option chain is essential. Having a good understanding of the various components can help you identify what you need and how to trade accordingly.

    Bid and Ask Price - You will also see two columns to the right of each option’s expiration date: bid and ask. The asking price is what you must pay if you want to buy an option, while the bid price is what you receive if you’re going to sell an option.

    Strike Price – The strike price is the price at which the underlying stock can be bought or sold for the contract duration.

    Expiration Date – The chain is often organized by expiration date. In this case, the options expire first at the top. The expiration date will determine how long the contract is in existence.

    Intrinsic Value – This value is used to describe how far in-the-money (ITM) or out-of-the-money (OTM) an option is. It can be determined by subtracting the strike price from the underlying stock’s market price. If that number is positive, it’s ITM; if it’s negative, it’s OTM.

    Option Type – This field denotes whether or not this option is a call or put option.

    Volume - Volume represents the number of transactions during a specified amount of time. Regardless of whether it is closing or opening, any option will be reflected in the volume.

    Open Interest – Open interest shows the number of contracts in existence for that option contract. At the end of the trading day, all closed warranties are subtracted from open interest, and all available contracts are added to the open claim.

    Change - Indicates how far or how close the ask is from the bid price and represents whether the option has been trading higher (up) or lower (down) than its previous day’s closing or opening prices.

    Last - The last traded price of the option contract is sold to open buyers or bought from open sellers at a specific point in time during its trading session. This figure will update intra-day until the market closes for trading under normal circumstances. In some cases, due to market disruption, this information may only be available at closing time.

    Understanding Greeks on the Options Chain

    Options greeks are a group of variables that affect option positions. They are typically referred to as delta, gamma, theta, vega, and Rho in the options market. These variables indicate how changes in the underlying asset’s price (the stock), volatility, and time will affect the value of a position.

    Taken together, these values make up what is known as an option chain for any specific option with a given strike price and expiration. This is why there are different greeks for different strikes and expirations - because the variables change depending on where you are on the chains. The other non-greek variables involve how the price of an option may vary based on stock price movement, time, and volatility.

    Delta represents how much an option’s value will change if $1 changes the underlying asset. Gamma means how much an option’s delta will change if a $1 change in the underlying asset. Theta represents how much an option’s value will vary due to time decay. Vega means how much an option’s value will change due to a 1% increase in implied volatility. Finally, Rho represents how much an option’s value will vary due to a 1% increase in interest rates.

    The Greeks are typically represented by a small letter next to the strike and expiration date on an options chain. For example, the value of delta is represented by the Greek letter Δ. Likewise, gamma is illustrated by Γ, vega by ν, theta by θ and Rho by ρ.

    Let’s Look at a Scenario to Explain the Options Chain.

    First, let’s look at options in general. For example, in today’s market, you can buy 100 shares of Apple for about $15,000 - $16,500. Using options to control that same 100 shares would cost you about $1500-$1800 but be more flexible with your investment.

    For instance, let’s consider the risk of owning a call/put option on Apple. Your price per share is $170; however, if Apple dives, your price option could skyrocket depending on the time frame, type, strike price, and other key option chain details.

    Understanding the options chain will get you into the proper contract at the right time to make sure that you cover your existing position or grow your options contract value on a singular trade. For instance, in the above example, the options chain tells you that the highest bid for a 60-day option call with a strike price at a good range, or the lowest ask is for a put with a desirable strike price. In addition, you can determine if the best option is one that expires now or later, and so much more. 

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