Options Chains

[Igor 10]

An option chain is simply a list of buy and put options available for trading. Companies listed in world stock exchanges must meet certain criteria to list options in an options exchange. In most cases, only large to medium business qualify to offer stock options to investors. Most online traders can find stock options by getting a price quote for the stock that they're interested in. Inside the quote, investors should see a link to an option chain, if the company offers options for trading.

 

Example:

1) Investor wants to know if GE lists options.

2) Trader logs into their broker and gets a quote.

3) Quote window returns GE selling at $20 with a checkbox for options.

4) Investor clicks box and an option chain appears.

 

Option Chain Layout

Every broker has their own format for listing options. Traders who are unfamiliar with option chains can understand most layouts once they are familiar with the terms and sections that appear in every chain.

 

Brokerage houses must list basic information for every call and put option. This includes listing the option's symbol, strike price, option type, last bid price, ask-bid spread, underlying security market price and expiration date.

 

 

Underlying Asset and Option Information

At the very top of most option chains rests the underling asset's stock symbol, its current market trading price and the option's expiration date. This information applies to every call and put option in the chain.

 

Reading Calls and Puts in an Options Chain

Most broker systems list call options on the left side of a chain window. Put options show up on the right-hand side. Chain windows list in-the-money options first in the call section and last in the put column. Broker systems usually highlight options that are in-the-money, so that traders can easily find them.

 

Understanding the Strike Price in an Options Chain

Most option chains list the strike price in a column between calls and puts, since the strike price is the same for each one. Its price declines in intervals, depending on the market price of the underling asset. Traders can usually find call and put options with strike prices in intervals of 2.5 to 10 points.

 

Option Symbols

Before computers, an option symbol contained a lot of information. Traders could find the name of an underlying asset, the expiration date and strike price just from reading the symbol's numbers and letters. Today, the option chain erases the need for understating symbols, since all the information is already listed in the chain itself. It's still a good idea for investors to grasp the ideology of option symbols, for when a computer is not available.

 

Example:

GEA40

GE = 1 stock option for GE stock

A = January expiration date (listed A-L, with L for December)

40 = Strike price

 

Last Bid Price and Ask-Bid Spread

The last bid price is simply the price of the last transaction for that option. The transaction could have occurred a day ago, a few hours ago or just a few seconds ago. Time of the last bid depends on an option's volume and volatility.

 

As traders place orders in auction, the prices that they ask to buy and sell become the bid-ask spread. Popular options have thinner spreads. Traders who want to enter or leave the market quickly should look for options with smaller gaps between the ask and bid price. The more the option exchanges hands (liquidity), the faster orders will execute. On the contrary, option chains with larger bid-ask spreads have a lower trading interest, creating larger gaps between the buy and sell prices.

 

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