The Easiest Guide To Reading An Options Chain

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Learning how to read an options chain table is crucial to profitable options trading.

Most stocks have an options chain table. Each options chain table has a monthly expiration date(weekly expirations are new). Normally, you can view the option chains table for a stock for each month. The option's expiration date for the month is normally also listed.

The Bid and the Ask prices in the stock options chain table are quoted per share. So if you buy 1 contract(which is equivalent to 100 shares), you would need to multiply it by 100 to get the correct price for 1 contract.

Lets review how to read an options chain table in more detail. You can find these on Wall Street

Options Chain table has Calls and Puts. We'll be reviewing Calls only (Puts follow similar logic). Referencing the table below, 1 call option with strike price $34 will cost ($2.44 *100) = (BidPrice * 100) =$244 excluding commissions. This call option gives you the right but not the obligation to buy 100 shares for this stock at $34 each at any time before expiration date(in this case June 22, 2013). This is called exercising the option which most investor don't really do. Instead they just sell this call option after it has appreciated.

Note that for the same stock, option trading is happening at different strike prices.

Current Stock Price: $35
Percentage Change at the end of the day-> 4% Up

Option Chains Quotes Table (CALL OPTIONS) for stock A for the month of June - Expiration June 2013 (Expires on June 22, 2013)
Strike Price Symbol Direction Change Last BID ASK Delta VOL OPEN INT In/At/OutOfTheMoney
30 stocka12xx Up 3.50 6.19 5.39 5.59 0.99 2 100 In the money
31 stocka12xx Up 2.94 4.83 4.49 4.69 0.90 2 23 In the money
32 stocka12xx 0.00 3.90 3.69 3.89 0.80 12 24 In the money
33 stocka12xx Up 1.58 3.10 2.99 3.19 0.70 2 5 In the money
34 stocka12xx Up 0.90 2.45 2.34 2.44 0.60 3 20 In the money
35 stocka12xx Up 0.77 1.86 1.79 1.89 0.50 4048 45 At the money
36 stocka12xx Up 0.84 1.34 1.29 1.39 0.40 154 14 Out of the money
37 stocka12xx Up 0.50 1.04 0.89 1.00 0.30 18 274 Out of the money
38 stocka12xx Up 0.50 0.64 0.59 0.69 0.20 303 780 Out of the money
39 stocka12xx Up 0.44 0.44 0.39 0.49 0.10 109 244 Out of the money
40 stocka12xx Up 0.22 0.32 0.24 0.34 0.01 22 5317 Out of the money

TERMINOLOGIES - Options Chain Analysis


Contract

1 contract is equivalent to 100 shares. You buy options in contracts e.g. 3 call option contracts for $33 strike for June Expiration

Bid

This is the price at which you SELL your existing option(multiply by 100 to get the cost for 1 option contract-100 shares) E.g. You can sell your existing 1 call option contract for $34 strike price at $2.34*100 = $234

Ask

This is the price at which you BUY an option(multiply by 100 to get the cost for 1 option contract-100 shares) E.g. You can buy 1 call option contract for $34 strike price at $2.44 *100 = $244

Vol

Total number of contracts traded for the latest day/session(on a strike price). Remember traders trade options at different strike prices.
E.g. For a strike price of $34, 3 contracts were traded for call options during the last day/session

Open Int

Total number of open contracts that have not been exercised and have not yet expired. E.g. 20 contracts are open for Strike price $34. Investors who hold these contracts can sell them or exercise them. It shows which strike prices are being heavily bet on or have contracts against them.

Expiration Date

This is the date on or before which you can exercise your right to buy/sell the underlying shares of an option. E.g. The Expiration Date for the above Call Options table is June 22, 2013

Delta

This tells us how fast the option price will change with a corresponding change in the underlying stock price. For instance a delta of $0.7 for a strike price means that for $1 increase in stock price, the call option price will increase by $0.7. You can view option delta values at http://www.optionsxpress.com

In the Money

When the strike price is lower than the current stock price

At the Money

When the strike price is equal to the current stock price

Out of the Money

When the strike price is higher than the current stock price

Strike Price

This is the fixed price at which you can buy the shares if you exercise your call option

Change

This is the option price change(per share) from yesterdays/last session close

Direction

Indicates if the option price increased or decreased

Last

Indicates the last trading price of the option

Symbol

Each option has its own symbol

Note:Deep in the money(strike price way lower than stock price) have higher deltas than Deep out of the money(strike price way higher than stock price) which implies that IN the money option prices increase higher in general than out of the money for a corresponding increase in stock price.

However, since deep in the money costs more, you buy relatively less "in the money" contracts than "out of the money" for a fixed some of money as well. That's why it's a good idea to buy slight in the money call options (balance between cost, # of contracts and better liquidity)!

Conclusions drawn from reading the above options chain table?
1)IN the money costs more(and also retain value better) than AT or OUT of the money
1 Call option contract(100 shares) at strike price $30 costs $559(5.59*100) whereas
1 Call option contract(100 shares) at strike price $36 only costs $139(1.39*100)
2)Call options for strike price $35 had more volume/option contracts traded(4048) than other call option strike prices
3)Traders have a lot of open contracts around strike prices $36-40 for call options than for other strike prices. This might indicate that the traders think the price might appreciate or the contracts might be there for hedging purposes(might have an alternate position as well) to offset it.



Sample Example


On June 10, I have $1500 and the earnings report for a stock A is due on June 13. I think the current stock price $35 will rise by 20% to $42. Give me a sample option that I should place?

Strike Price Symbol Direction Change Last BID ASK Delta VOL OPEN INT In/At/OutOfTheMoney
34 stocka12xx Up 0.90 2.45 2.34 2.44 0.60 3 20 In the money

Let's assume a commission of $7 per trade and $0.80 per contract.

You should place a call option! A modest call option(profit still better than stocks) would be buying Strike $34(slight in the money) call options as seen above.

Since the ASK price is 2.44, 1 call option contract(100 shares) will cost $244. Since you have $1500, you can buy around $1500/$244 = 6 call option contracts for Strike price $34 expiring June 2013.

Total option cost for 6 call option contracts:
=6*244(6 contracts) + $8(commission for 1 trade) + 0.75*6(commission for 6 contracts)
=$1464 + $8 + $4.5
=$1476.5

Also, please note that currently the BID price is $2.34 which informs you about the price you can SELL the option that you just bought. Now let's say the price does increase to $42. If you look at the options table again at the strike price $34, you will notice that the Bid price has increased to a higher value. Taking delta as 0.60 or 60% for the $34 strike price, the increase in stock price to $42 is a difference of $6. Since we know that option delta tells us how much the option price will change with the underlying stock price change, as the stock has moved up by $6, the option should be expected to go up by approx $6*60% = $3.6. The actual premium increase might be slightly different. Let's assume $3.00. This brings the new bid value to $2.34 + $3 = $5.34(originally $2.34). Each contract (100 shares) that you can sell at this strike price will now be worth $534. Below is your options new recalculated value.

Total option sale value for 6 call option contracts
=6*534(6 contracts) - $8(commission for 1 trade) - 0.75*6(commission for 6 contracts)
=3204 - 8 - 4.5
=$3191.5

You can now go ahead and sell the CALL option to lock in the profit ($3191.5 - $1476.5) = $1715 or a 1715/1476.5*100= 116% profit on your original $1476.5 investment while the stock moved up by 20%.

Original Investment Increase in Stock price % Profit % using Options Profit % using Stocks $ Profit Using Options $ Profit Using Stocks
$1476.5 20% 116% 20% $1715 $298 (1500-7 *0.2)


Using Call options resulted in almost 6 times(20%*6 ~ 116%) more profit than using regular stocks!

In Summary, knowing how to read an options chain table is a prerequisite to placing profitable call options and thus need to be given high priority.



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