A Newbie's Guide to Reading an Options Chain

Option charts

The Bottom Line Options have a language all of their own, option charts when you begin to trade options, the information may seem overwhelming. When looking at an option charts chart, it first seems like rows of random numbers, but options chain charts provide valuable information about the security today and where it might be going in the future.

Not all public stocks have options, but for those that do, the information is presented in real-time and in a consistent order.

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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.

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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 is also listed, which is option charts stock price at which the investor buys the stock if the option is exercised.

Options list various expiry dates, which impact an option's premium. What an Options Chain Tells You Options contracts allow investors to buy or sell a security at a preset price.

Basic Options Charts

Options derive their value from the underlying option charts or stock, which is why they're considered derivatives. Calls and Puts Options chains are listed in two sections: calls and puts. A call option gives you the right but not the obligation to purchase shares of the stock at a option charts price up to a certain date. A put option charts also gives you the right and again, not the obligation to sell shares at a certain price up to a certain date.

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Call options are always listed first. Expiration Date Options have various expiry dates. Each option contract has its own symboljust like the underlying stock does. Options option charts on the same stock with different expiry dates have different options symbols. Strike Price The strike price is the price at which you can buy with a call or sell with a put.

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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. With options, the market price must cross over the strike price to be executable. Premium The last price is the most recent posted trade, and the change column shows option charts much the last trade varied from the previous day's closing price.

Think of options just like stocks as big online auctions. Buyers are only willing to pay so much, and the seller is only willing to accept so much. Negotiating happens at both ends until the bid and ask prices start coming closer together.

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Finally, either 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 very far apart.

Buying an option like this can be a big risk, especially if you are a new options trader. The price of an options contract is called the premiumwhich is the upfront fee that a buyer pays to the seller through their broker for purchasing the option.

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Option premiums are quoted on a per-share basis, meaning that an options contract represents shares of the 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.

The next row shows the value of the call option for each scenario. If the asset's value is less than or equal to option charts strike price, then the call option is worthless; however, if the asset's value is greater than the strike price, then the call option can be used to make a profit of S-X. The next line shows the cost of the premium at each scenario--since we are long on the option, the premium is some negative number whatever was payed to purchase the option.

If there's little chance the option will be profitable, the premium or cost of the option is low. Other factors impact the price of an option, including the time remaining on an options contract as well as how far into the future the expiration date is for the contract.

A Newbie's Guide to Reading an Options Chain

Conversely, 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 option charts. Open Interest and Volume While the volume column shows how many options traded in a particular day, the open interest column shows option charts 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.

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A high number of open interest means that investors are interested option charts 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 provide an indication 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 those investors are correct in their directional views of the stock.

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

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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.

Option charts charts 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 also comes into play in determining profitability. It's important that investors factor in the cost of the premium when calculating the potential profitability of a trade.

If an option is out of the moneyit means 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.