Welp…there is it. The good old options chain. It’s funny how we get so many questions from people revolving around options chains. How to read option chains? How to read an option chain? How to read options chain? Literally every single morning my inbox is flooded with these five-word questions that people simply do not know how to understand. Like everything else market related, we will cut through the fat and only focus on exactly what we need to be successful. We will spend the rest of this article going through how to read an option chain and all the fun things that come with it.
How to Read Options Chain…Back It Up Big Guy
For starters, most people (like the video you will see below in a second) jump right in. They want to show you the cool numbers of blinking lights and features and everything. But we need to get more basic here folks.
For starters, here we see the entire options table for $SPY from now (February 19) until the end of June (June 30). This view lists all of the expiration cycles.
Above we see a list the expiration cycles for $SPY (the S&P 500 Index ETF). We see weekly options marked with the word “Weeklys” that represent expirations that fall on a Wednesday or Friday that are not a monthly expiration. Those monthly expirations in white with no notation after them are for the expirations on the third Friday of every month. These monthly options are the most popular and have the most liquidity and participation. Finally, we see “Quarterlys” options who’s expectations are on the last day of the quarter. Every expiration is also noted with days until expiration in parenthesis.
How to Read Option Chains…Get Rid of All the Fat
Here is your standard video on how to read an option chain.
There is wayyyyyyy to much going on here as usual.
In fact, right now on my ThinkorSwim trading platform, here are the 30 potential pieces of information I can add to my options chain.
% Change, Ask Size, Bid Size, Covered Return, Delta, Extrinsic, Gamma, High, Impl Vol, Intrinsic, Last Size, Last X, Low, Mark, Max Covered Return, Open, Open Interest, Option Code, Position, Probability ITM, Probability OTM, Probability of Touching, Return on Capital, Return on Risk, Rho, Size (Bid x Ask), Theo Price, Theta, Vega, and Volume.
30 is too much. We prefer adding just 6 of the above to the two that come on every option chain on every platform, Bid and Ask. While the above 30 pieces of data all have a time and place, we only need to focus on the following 6:
Open interest. Something people actually are not very familiar with. But have no fear!
Let’s go through and example to help out.
I go out tomorrow morning a buy 10 calls at the $200 strike in Steven’s stock. Obviously, at the same time, someone sells those calls that I am buying. If neither myself or the guys who sold me the calls does anything else, the open interest at the $200 strike in Steven’s stock would be 20. Unlike stock where there is a finite amount of shares available, this is not the case for options contracts. For options contracts, an unlimited amount can be created. Open interest represents how many options contracts there are outstanding that have not been closed.
Volume. Simple enough right?
Volume is how many contracts were traded at that price on that day. In the above example, 4,448 contracts were traded for the $237 call in $SPY on Friday. The more volume the better. If there is not a decent amount of volume, stop and go to another stock.
The mark is one that very few people have heard about. The mark is simply the mid price or the middle price between the bid and the ask. The mark is crucial because all probabilities for options are based off the mark/mid price. If the mark isn’t a few pennies away from the bid or the ask, you have a problem and should look to trade a different stock.
The last X is the last price of a trade in that month and strike price. For example, the $236 call’s last trade price was at $2.99. What is important for the last X is that
- It is within a few pennies of the bid or the ask
- It is within a few pennies of the mark
If these two things are not true, it means that midprice is inaccurate for that option and trading options for that price will result in your having to pay up to make the trade. Move on and find another stock if those two things don’t happen.
Delta. You most likely have never heard of this before. Delta tells us how much stock equivalent we have if we buy or sell the option. For example, if we buy the $236 call in the photo above, it comes with a 44 delta meaning we will be synthetically long 44 shares of $SPY. At the same time, if we were to go ahead and sell the $236 call, we would be synthetically short 44 shares of $SPY.
Well, how do you know what you have on? Position! Duh!
I do not have any position on in $SPY right now (which is probably the first time ever) but we do have some position on in $SPX. $SPX is the S&P 500 index itself and is ten times the size of $SPY. Right now we are short 1 $2430 call. The reason we know this? Our position for that strike is -1. If we were to be long it, it would be +1.
How to Read an Option Chain
Now you know exactly what we look at every day. So the next time someone asks you how to read option chains you can simply say…look at the following:
- Open Interest
- Last X
And those as well as the Bid and the Ask will tell you everything you need to know about how to read options chain.
Keep is simple.