Your search to understand a stock option chain ends today! This lesson will walk you through a step-by-step process of understanding option chains.
Learning how to read an option chain is a vital component to options trading. Many traders lose money because they don't fully understand option chains.
2 lessons that may be helpful to review for this lesson are:
An option chain is a list of all the stock option contracts available for a given security (stock).
There are only 2 types of stock option contracts, puts and calls, so an option chain is essentially a list of all the puts and calls available for the particular stock you're looking at.
Now that wasn't so hard to understand was it? Well the confusing part comes when you actually pull up a stock option chain.
All that easy-to-understand information suddenly gets lost in translation and you're left looking at a table full of numbers and symbols that make absolutely no sense at all.
Before you learn how to read an option chain, let's do a quick recap of the 7 step trading process thus far:
Part of the confusion in understanding option chains is that every option chain looks different.
If you go to Yahoo, MSN, CBOE, or your brokerage account and pull up an option quote, you will notice that the layout of each of their option chains is completely different.
They all essentially have the same information displayed, but look completely different.
Let's use a snippet of the stock option chain listed above, which is a Yahoo stock option chain of the stock symbol "MV":
As you can see from the picture there are several different expiration months listed horizontally across the top of the option chain (Aug 09, Sep 09, Dec 09, etc.). For our example we are looking at all the call and put options that expire the 3rd week of December 2009.
Some traders want to stay in a trade 1 week, some want to stay in a trade 2 months, so your trading plan will dictate which month you look at.
I like to give myself plenty of time for the trade to work out so I always try to look at options that expire 2-6 months from the current date.
Calls Options and Put Options
Each stock option chain will list out all the call options and all the put options for the particular stock. Depending on which option chain you are looking at, the call options may be listed above the put options or sometimes the calls and puts are listed side-by-side.
The first column lists all of the different strike prices of the stock that you can trade. The strike/exercise price of an option is the "price" at which the stock will be bought or sold when the option is exercised.
The second column lists all of the different ticker/trading symbols for each stock option.
"MVLLE.X" is the ticker symbol for the 09 December 25 call option. The symbol identifies 4 things: which stock this option belongs to, what the strike price is, what month it expires in, and if it is a call or a put option.
The third column lists the last price at which an option was traded (was opened or closed). It's the price at which the transaction took place. Be aware that this transaction could have been minutes, days, or weeks ago, and may not reflect the current market price.
The fourth column lists the change in the options price. It shows how much the option price has risen or fallen since the previous day's close.
The Bid price is the price that a buyer is willing to pay for that particular stock option. It's like buying a home at an auction, you bid (offer) what you are willing to pay for the home.
When you are selling an option contract, this is usually the price you will receive for the stock option.
The Ask price is the price that a seller is willing to accept for that particular stock option. This is the price the seller is "asking" for.
So when you are buying an option contract this is usually the price you will pay for the stock option.
BE CAREFUL: remember one stock option contract controls 100 shares of stock. So whatever Bid/Ask price you see has to be multiplied by 100. This will be the actual cost of the contract.
List how many stock option contracts were traded throughout the day.
Open Interest (Open Int)
This column lists the total number of option contracts still outstanding. These are contracts that have not been exercised, closed, or expired. The higher the open interest, the easier it will be to buy or sell the stock option because it means a great deal of traders are trading this stock option.
Watch the video below to get instructions on how to find the stock option chain for a stock:
In the previous lesson you performed stock trend analysis to find trades. Let's pretend you found a potential trade. You then look over the option chain and pre-select the option you're going to buy or sell.
When you are looking at the stock option chain there are 7 factors that will affect what stock option you choose:
In the next lesson you'll see how all of this plays out in a real trade.
Module 6: Trading Options
Module Instructions: According to how the site is set up, you are now in Module 6: Lesson 5 (Stock Option Chain). For the most effective learning experience, read through each lesson in this module one by one, in the exact same order as they are listed in the table of contents to the left.