Reviewed by Thomas Brock
Fact checked by Vikki Velasquez

Options Chain: An Overview

Traders in options have a language all of their own. At first look, an options chart appears to be made up of rows of random numbers, but those charts provide valuable information about the instrument today and where it might be going in the future.

Not all stocks have options, but for those that do, the information is presented in real-time and in a consistent order. Learning the language of an option chain can help investors become more informed, which can make all the difference between making or losing money in the options markets.

Key Takeaways

• An option chain has two sections: calls and puts. A call option gives the right to buy a stock while a put gives the right to sell a stock.
• The price of an options contract is called the premium, which is the upfront fee that an investor pays for purchasing the option.
• An option’s strike price, which is also listed, is the stock price the investor will pay if the option is exercised.
• Options list various expiry dates, which impact an option’s premium.

Finding Options Chains

Real-time option chains can be found on most of the financial websites online, along with stock prices. These sources include Yahoo Finance, The Wall Street Journal Online, and online trading sites such as Schwab.com.

On most of these sites, if you find the chart of a stock that has options there will be a link to the related options chains.

What an Options Chain Tells You

An options contract is an agreement that gives its holder the right, but not the obligation, to buy or sell an underlying stock at a predetermined price and date. Essentially, it is a bet on the direction of a stock’s price.

Options derive their value from the underlying security or stock, which is why they’re considered derivative investments.

Options traders track their investments by following options chains that contain the information below.

Calls and Puts

Options chains are listed in two sections: calls and puts. A call option gives the investor the right (but not the obligation) to purchase 100 shares of the stock at a certain price up to a certain date. A put option gives the investor the right (and again, not the obligation) to sell 100 shares at a certain price up to a certain date.

Call options are always listed first in an options chain.

Expiration Date

Options have various expiry dates. That is, you could buy a call option that expires in April, or another that expires in July. Options with less than 30 days to their expiry date start losing their value quickly, as there is less time to execute them.

The order of columns in an option chain is as follows: strike, symbol, last, change, bid, ask, volume, and open interest.

Each option contract has a symbol, just like the underlying stock does. Options contracts on the same stock with different expiry dates have different options symbols for each date.

Strike Price

The strike price is the price at which you can buy (with a call) or sell (with a put).

Call options with higher strike prices are almost always less expensive than lower striked calls. The reverse is true for put options—lower strike prices also translate into lower option prices. 

The market price must cross over the strike price to be executable. For example, if a stock is currently trading at $30 per share and you buy a call option for $45, the option is worthless until the market price crosses above $45.

Premium

The last price is the most recent posted trade, and the change column shows how much the last trade varied from the previous day’s closing price.

Bid and ask listings show the prices that buyers and sellers, respectively, are willing to trade at right now.

Options, like stock shares, are online auctions. Buyers are only willing to pay so much, and sellers are only willing to accept so much. Negotiating happens at both ends until the bid and ask prices meet.

Finally, the buyer will take the offered price or the seller will accept the buyer’s bid and a transaction will occur. With some options that do not trade very often, you may find the bid and ask prices are far apart. Buying an option like this is a big risk, especially if you are a new options trader.

The price of an options contract is called the premium. This is the upfront fee that a buyer pays to the seller through a broker for purchasing the option.

Option premiums are quoted on a per-share basis, meaning that an options contract represents 100 shares of the stock. For example, a $5 premium for a call option would mean that that investor would need to pay $500 ($5 * 100 shares) for the call option to buy that stock.

Fluctuation

The option’s premium fluctuates constantly as the price of the underlying stock changes.

These fluctuations are called volatility and impact the likelihood of an option being profitable. If a stock has little volatility, and the strike price is far from the stock’s current price in the market, the option has a low probability of being profitable at expiry.

If there’s little chance the option will be profitable, the premium or cost of the option is low. The higher the probability a contract could be profitable, the higher the premium will be.

Other factors affect the price of an option, including the time remaining on an options contract as well as how far into the future the expiration date for the contract is.

For example, the premium will decrease as the options contract draws closer to its expiration since there’s less time for an investor to make a profit.

Options with more time remaining until expiry have more opportunities for the stock price to move beyond the strike and be profitable. As a result, options with more time remaining typically have higher premiums.

Open Interest and Volume

While the volume column shows how many options traded in a particular day, the open interest column shows how many options are outstanding. Open interest is the number of options that exist for a stock and include options that were opened in days prior.

A high number of open interest means that investors are interested in that stock for that particular strike price and expiration date.

Open interest is important because investors want to see liquidity, meaning there’s enough demand for that option so that they can easily enter and exit a position. However, high open interest doesn’t necessarily indicate that the stock will rise or fall, since for every buyer of an option, there’s a seller.

In other words, just because there’s a high demand for an option, it doesn’t mean their investors are correct in their view of the stock’s direction.

In- or Out-of-the-Money Options

Both call and put options can be either in or out of the money, and this information can be critical in making your decision about which option to invest in.

In-the-money options have strike prices that have already crossed over the current market price and have underlying value.

For example, if you buy a call option with a current strike price of $35 and the market price is $37.50, the option currently has an intrinsic value of $2.50. Intrinsic value is merely the difference between the strike price of an option and the current stock price. You could buy it and immediately sell it for a profit.

That guaranteed profit is already built into the price of the option, and in-the-money options are always far more expensive than out-of-the-money ones.

In other words, the premium for the option comes into play in determining the profitability of the trade. If the $35 strike option had a $5 premium, the option wouldn’t be profitable enough to exercise (or cash out), even though there’s $2.50 in intrinsic value.

It’s important to factor in the cost of the premium when calculating the potential profitability of a trade.

Out of the Money

If an option is out of the money, the strike price hasn’t yet crossed the market price. You are wagering the stock will go up in price (for a call) or down in price (for a put) before the option expires.

If the market price doesn’t move in the direction you wanted, the option expires worthless.

Below is a table that shows the relationship between an option’s strike price and the stock’s price for call and put options. The term underlying represents the price of the stock that’s being traded through the options contract.

How Do Investors Make Money Trading Options?

Options trading is a bet on the price direction of a stock or other asset. In short, the traders who guess right win:

• The buyer of a call option profits if the underlying asset rises in price before the option expires.
• The buyer of a put option profits if the underlying asset declines in price before the option expires.
• The option writer, who sells option contracts, collects the premium upfront, making a relatively small profit that adds up with the sheer volume of transactions.

What Options Are Traded Besides Stock Options?

Options are traded not only in stocks but in mutual funds, indexes, and commodities. Commodities options are traded for a vast range of physical products from gold and silver to corn and cattle.

Do Individual Investors Trade Options or Is the Options Market Just for Pros?

Due to ubiquitous access to online trading platforms, anyone can buy and sell options these days. That doesn’t mean that everyone should. Some individual investors use options to hedge against the risk of losses in their other holdings. Like all derivatives, options are considered risky investments.

The Bottom Line

Knowing how to read options chains is an integral skill to master. Options chains contain the information an investor needs to track options investments and decide when to act and when not to act.