How to Read an Options Chain

Trading options in general can be difficult. Even more so, it is hard to know which options to trade once you’ve made the decision to move forward. To start, you need to evaluate what is available as far as expiration dates and strike prices. For this information, you will need to study an options chain. (All platforms are different, but the example below displays the options chain link just below the stock price.)

An options chain is where you will find quotes for puts and calls, in addition which strike prices and expiration periods are available. Some traders refer to an options chain as an options matrix, since it resembles a matrix that you might see in mathematics. Here, we will unpack all of this for you.

While platforms may display option quotes in various ways, you will likely see a string that displays the symbol, year, month, date and strike price when you search for options. In terms of how you can trade the options, they have 4 possible trades that can be made:

• Buy to open — purchasing options
• Sell to close — selling back purchased options
• Sell (write) to open — selling options 
• Buy to close — buying back sold options

Important: Make sure that you double or triple-check the trade that you are entering. Not all trading platforms will prevent you from making a “wrong” trade. If you happen to enter the wrong trade, it is possible that you could have your account frozen.

Here is what an options chain might look like:

You can see that this options chain is based on the underlying Apple stock (it closed at $123.24 per share on this trading day). The calls are listed on the left, and puts on the right. Strike prices are listed in the respective put or call columns, and the expiration date is listed next to the ticker symbol on top. “In the money” options are shaded yellow. In an options chain like this, you might expect to see the following items:

• Open interest: The number of option contracts that remain outstanding at any given moment. When you close an option contract, it reduces the open interest.
• Volume: Option volume works just like stocks. It represents the number of contracts traded for that day.
• Bid: The best available price you can sell an option.
• Ask: The best available price you can buy an option.
• Last: The price of the last transaction.
• Change: The change in price from the previous day’s close.

Depending on the platform that you use, these indicators might be available as well:

• Midpoint: The halfway point between the bid and the ask.
• Delta/Gamma/Theta/Vega/Rho: These are “Greeks”. Option chains will either provide you a whole number or decimal less than zero. Whole numbers like 15 or 16 should be assumed to be 0.15 or 0.16, respectively. All of these measure the sensitivity to a change of one unit for that component.
• Put/call ratio: This represents the number of puts traded to the number of calls traded for that day. Traders tend to buy more puts when they believe the market will decline or need protection. The ratio is very different for stocks versus indices. The put/call ratio for stocks was 0.65 on average, from 2006-2019, and averaged 1.75 for the S&P 500 Index (SPX) from 2010 to 2019.
  • Some traders like to use this ratio as a contrarian indicator, and when it gets too high, it may indicate the end of a recent decline. However, one major drawback is that it cannot tell you whether the volume comes from people buying or selling the puts or calls. 

Available Expirations

Once you have decided to purchase an option of a particular underlying stock, you need to choose the strike price and expiration date. Picking the best expiration date is challenging. You don’t get to own an option forever like you could a stock. Each option has a fixed date on which it expires in the future, so you need to buy the right one that fits with your strategy. If you buy an option with an expiration date too far out in the future, you could be correct on the stock’s direction in the short term, but the value of the option might not go up as much as if you bought a nearer-term expiration. On the other hand, if you go too short-term on your expiration, then the stock might not move in the time you own the option.

Option expiration choices depend on the interest in the stock. Highly traded stocks like Apple (AAPL) will have weekly expirations, while lower-volume small-cap stocks may have only monthly or quarterly expirations available. 

Following are the expiration periods that are typically available:

• Quarterly: Every stock will have quarterly options at a minimum. Quarterly options expire on the third Friday in the last month (March, June, September, December) of every quarter. Traders call this date “quadruple witching” because stock options, index futures, single stock futures, and stock index options simultaneously expire.
• Monthly: Monthly options expire on the third Friday of every month. You will also find monthly expirations for the next month or two, plus two additional months from the January, February, or March quarterly cycles.
• Weekly: Options that expire on stocks every Friday are known as “weeklies.” Weekly options only go out two months. 
  Intra-week: High-volume names like the SPDR S&P 500 ETF Trust (SPY) will have multiple expirations during a week. Intra-week options tend to expire on Mondays and Wednesdays, on top of the Friday weekly options.
• LEAPS: Options with expiration dates that go out up to three years are known as Long-term Equity Anticipation Securities.

Note: If the expiration Friday happens to be a holiday where the market is closed, the expiration will move to the third Thursday of the month.

Placing an Options Trade

Although you might think that we do not need to tell you how to place an option order, getting the best price is another matter. Here are a few tricks that might help you out:

• Knowing tick sizes: Option orders priced below $3 need to be submitted in ticks (increments) of $0.05. Anything above $3 needs to be placed in $0.10 ticks. However, the CBOE has a Penny Pilot Program with many popular stocks like Apple, which allows them to trade in $0.01 ticks on options less than $3, and $0.05 ticks on options greater than $3.
• Using only limit orders: Option volumes are not nearly as heavy as stock volumes. Some of the best options might only trade 50,000 contracts per day, while most only trade a few hundred. You can place limit orders at the midpoint of the bid/ask, and move your order by increments of $0.01. We recommend that you do not go past halfway between the midpoint and the ask price. You should also not accept limit orders at the ask price if the spread is too wide, as this will cut into your profit potential.
  • Often the best way to trade is to pick your price and leave the order. Let the market come to you. If the order doesn’t get filled, there will always be another trade around the corner.
    Selling options at the open, but waiting to buy them: Traders and computers work feverishly to figure out the right price at the opening bell. This uncertainty drives up the implied volatility in options, which makes them more expensive. It’s a great time to sell, but a bad time to buy. If you want to buy an option, try waiting 30 minutes. The market will die down, which brings down implied volatility and the options price.
• Being careful of wide spreads: A red flag should go up when you see a bid of $0.10 and an ask of $4.00. That doesn’t mean you can’t buy or sell these options, but you should not use midpoints in this case. Most platforms or trading websites will have a tool that will give you a theoretical price of the option. Use that price for your trade, and do not move more than 1 or 2 ticks from that price in an attempt to get it filled.
  

Concluding Thoughts

If you plan on trading options regularly, it is worth taking the time to get familiar with options chains. These concepts are especially important for beginning options traders to grasp. Understanding indicators showing you what other investors are doing, such as open interest or volume, is key to helping you make the best trading decisions.

Furthermore, constructing an effective trading strategy will help to decide not only if you want to buy or sell an option, but whether you want to go with a shorter-term weekly option or a long-term LEAPS contract. When you are ready to take the plunge and make a trade, you will be fully aware of how to place the trade, along with maximizing your chances of success.