What is an option chain and how do you read it?

An option chain is a table that lists information about the existing options contracts related to a given underlying security — including premiums, strike prices, expiration dates, trading volume, and open interest. It gives you the key information and variables to choose which option you’re interested in.

What information is on an option chain?

An option chain for a specific security will often list call options on one side and put options on the other. A call option contract gives its holder the right (but not the obligation) to buy the underlying security at a specified price at any point before a specific date. A put option contract is basically the opposite: you can sell the underlying security at a specified price any point before a specific date. 

Option contracts on the same underlying stock are distinguished from each other in two ways:

• Their expiration date (1), sometimes called a maturity date, is the last date on which the option to buy or sell the underlying security can be exercised.

  • Their strike price (2), or the price at which the contract gives its holder the right to buy or sell the underlying security.

A premium is the cost of purchasing a given option contract. An option chain will likely list three premium prices (3)  for a given contract:

• The last price it was sold for.

• The bid, which is the highest price a potential buyer is currently willing to pay for it.

• The ask, which is the lowest price a potential seller is currently willing to accept for it.

Option chains will also provide additional information that can help potential traders understand the dynamics of a given market, including: 

• Volume (4) - the number of contracts with a specific strike price and expiration date that were bought and sold on the previous trading day.

• Open interest (5) - the number of contracts with a given strike price and expiration date that exist but have not been exercised.

• Greeks (6) - calculations that reflect price sensitivity that could influence the option price.

Option chains for a particular stock may also display its current market price. Some also use fancy colour coding to show which available option contracts are currently in-the-money (ITM) or out-of-the-money (OTM). 

• A call contract is in-the-money if its strike price is lower than the underlying stock’s current market price. That means you would make money if you were to exercise the option by purchasing the security at the strike price, then selling it for a higher price on the open market. 

• A put contract is in-the-money if its strike price is higher than the underlying stock’s current market price. If you exercised your option you’d make money by buying the stock on the open market, then selling it at the higher strike price.

• A call contract is out-of-the-money if its strike price is higher than the current stock price.

• A put contract is out-of-the-money if its strike price is lower than the current stock price.

One important thing to note: calculations of whether an options contract is in-the-money or out-of-the-money do not take their premium price into consideration.