Options 02 · Options

Reading an Option Chain

The screen where you actually pick a contract

The option chain is the menu. Every contract available on a stock, laid out by strike and expiration, with the market's current pricing beside each one. It looks like a wall of numbers, and it is really only eight columns repeated.

Standard layout puts calls on the left, puts on the right, and the strike price down the middle. Pick an expiration date first — usually a tab or dropdown at the top — and the chain shows you every strike available for that date.

The two columns that decide your fill

Bid and ask are the only prices you can actually transact at. You buy at the ask and you sell at the bid, so the gap between them — the spread — is a cost you pay twice on every round trip, before the trade has done anything at all.

On a liquid contract that gap is a few cents. On an illiquid one it can be most of the contract's value. A contract quoted $0.02 bid, $0.18 ask means you pay $18 for something you can immediately only sell for $2. The stock has to move substantially just to get you back to even.

Volume and open interest

These two get confused constantly. Volume is contracts traded today, and it resets to zero every morning. Open interest is the total number of contracts currently outstanding, accumulated across all previous sessions.

Together they tell you whether you will be able to get out. A strike with heavy volume and heavy open interest has a real market in it — buyers and sellers, tight spreads, fills near the quote. A strike with 6 contracts traded and 44 open does not, and the moment you want to sell you will discover that the only bid is far below what your contract is theoretically worth.

IV and delta on the chain

Both get full treatment later — implied volatility in Module O5, delta in O4 — but you will see them on the chain from the start, so here is what they are for while you are reading.

• Implied volatility is how much movement the market has priced into that contract. Higher IV means a more expensive option for the same strike and date. Watch it climb as you look further from the money.
• Delta is roughly how much the option moves per $1 of stock movement, and doubles as a rough estimate of the market's odds that the contract finishes in the money. A 0.28 delta means about 28 cents per dollar, and about a 28% chance.

Delta is the fastest sanity check on the chain. If you find yourself drawn to a contract with a 0.05 delta because it is cheap, delta is telling you the market gives it roughly a one-in-twenty chance. That is the actual proposition, stated in a single number.

How to read a chain in ten seconds

1. Pick the expiration first

   Everything else on the screen depends on it, and it is the decision people skip.

2. Find where the stock is

   The ITM/OTM boundary. Everything above it in calls is hope; everything below has real value.

3. Scan open interest

   Rule out the dead strikes before you get attached to a price. Thin means trapped.

4. Check the spread on your candidates

   Bid to ask, as a percentage of the contract's price. Wide spreads are a tax on being right.

5. Read delta last

   It converts everything you just looked at into odds, and it is the honest number.