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Wednesday, May 16, 2007

Option Chain

Option Chain is a list of option prices of a particular underlying stock for various strike prices, expiration dates, and option types (calls or puts). This is where option traders get the current market price of an option during trading hours. The prices in the Option Chain will change throughout the trading day based on the stock price movement, volatility and time.

A sample of option chain can be seen below.

Picture courtesy of Optionsxpress.

THE COMPONENTS OF OPTION CHAIN:
  • Option Expiration Month: The months on top of the table.

  • Strike Price: The prices at the center (vertical).

  • Calls are at the left of the Strike Price, and Puts are at the right of the Strike Price.

  • Ask Price: The price when you buy an option (i.e. the price where the market makers are willing to sell).

  • Bid Price: The price when you sell an option (i.e. the price where the market makers are willing to buy).

  • Last Price: The last traded price.

  • Volume: The number of contracts traded for that particular option during the trading day.

  • Open Interest: The total number of option contracts that are still open for that particular option.

  • Symbol: A unique symbol assigned to that particular option of a certain underlying stock with certain strike price & expiration month.
A FEW THINGS TO HIGHLIGHT:
  • You can determine whether a certain option is In-The-Money (ITM) or Out-Of-The-Money (OTM) by comparing it with the current market price. In this example, the current market price is available just below the word “Strike Price”.

  • Some Option Chain may differentiate between ITM or OTM options by using different color. In this example, ITM options are shaded in yellow, while OTM options are in white.

  • For Call options, ITM options (shaded in yellow) are at the upper left side of the table. As you can see, the lower the Strike Price (the more ITM the call options), the more expensive the call option price will be. On the other hand, OTM options (in white) are at the lower left side of the table. The higher the Strike Price (the more OTM the call options), the cheaper the call option price will be.

  • For Put options, ITM options (shaded in yellow) are at the lower right side of the table. As you can see, the higher the Strike Price (the further ITM the put options), the more expensive the put option price will be. On the other hand, OTM options (in white) are at the upper right side of the table. The lower the Strike Price (the further OTM the put options), the cheaper the put option price will be.
EXAMPLES:

The picture above is the Option Chain for DELL with Expiration Month of Jun 07.
In this example, the last price of DELL is $26.02. This price is in between Strike Price 25 and 27.5.

Therefore, for Calls (at the left of the Strike Price column), the Strike Prices from 25 or lower are ITM options, while the Strike Prices from 27.5 or higher are OTM options.

And for Puts (at the right of the Strike Price column), the Strike Prices from 25 or lower are OTM options, while the Strike Prices from 27.5 or higher are ITM options.

Suppose you want to buy 2 contracts of DELL Jun 25 Call, the option price will be $1.7 (Ask Price), hence you need to pay: $340 (= $1.7 x 2 contract x 100 shares/contract).

Suppose you want to sell 2 contracts of DELL Jun 25 Call, the option price will be $1.6 (Bid Price), as such you will receive: $320 (= $1.6 x 2 contract x 100 shares/contract).

As you can see, if you buy an option and sell it immediately, you will lose $0.1 (=1.7 – 1.6) due to the Bid-Ask Price Spread.

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