How to Read Options Trading Charts

Options trading is a dynamic, fast-moving investment sector where making the right moves at the right time can earn an options trader a lot of money very quickly. One of the most important keys to being a successful options trader is understanding how to read options trading charts. Options traders use the information in options trading charts to make trades in a way similar to how general managers of sports franchises use deep analytics to determine which players to trade, and for how much. Keep reading to find out how reading an options trading chart can supercharge your returns. 

What are Options Trading Charts

Have you ever looked at a baseball player’s career statistics on the back of their trading card? Although these stats may look like random numbers to the untrained eye, they hold valuable information that tells the story of the player’s career in depth. 

Options trading charts, also referred to as option payout diagrams, show the profit or loss of an option position at expiration depending on where the stock is on that date. Reading and interpreting the information in option payout diagrams is a critical element of developing a successful options trading strategy. 

Options trading charts, which are also known as options chains, are tables used by options traders to assess the available options on a given stock or security. Reading and interpreting the information in options trading charts is a critical element of developing a successful options trading strategy. 

Options chains feature all the information a trader needs to make informed decisions about how they want to strategize their trades. Information that appears in an options trading chart includes:

• Calls
• Puts
• Strike price
• Trading volume
• Volatility
• Premium
• Option maturity date

When taken as a whole, all the information tells traders a story about their chosen stock's future, as anticipated by every other trader, or market consensus at the time. The more effectively traders can understand the information in an options chain, the better and more profitable their options trades will be. 

What Do the Items on the Options Chain Mean?

Holding an option on a particular stock or security entitles the holder to buy or sell their chosen stock by a predetermined date for a predetermined price. In order to make an informed decision about what option to buy, and how to maximize the value of that option, the investor will need to consult an options trading chart. 

To properly understand this chart, you will have to filter some information such as expiration date, call option or put option).  Once you have determined that, you will find the following columns on a typical options trading chart:

Calls and Puts

Option chains are broken down into two separate sections known as “calls” and “puts.” 

When a trader buys a call option, they purchase the right to buy a minimum of 100 shares of their chosen stock at a fixed price by a certain date. When a trader buys a put option, they purchase the right to sell a minimum of 100 shares of their chosen stock at a fixed price by a certain date, also known as the expiration date. 

It is important to note that regardless of whether a trader buys a call or a put option, they are not required to exercise the option. They can allow the option to expire if they choose not to execute it by its expiration date. They can also choose to sell the option to another trader prior to its expiration date. The call options on a particular stock will always appear first on an options trading chart. 

Strike Price

The strike price is perhaps the second-most-important piece of information in an options chain. When you hold a call option, the strike price is the price at which you agree to buy the stock. 

If you buy a call option for a strike price of $100, you have the right to exercise this option and buy your chosen stock once the stock’s value rises to your strike price (as long as this happens before your option’s expiration date) for $100 per share. 

If you buy a put option for a strike price of $100, you have the right to exercise this option by selling shares of your chosen stock at $100 per share when and if the stock falls and hits your strike price. 

Bids and Asks

Options traders have more flexibility than just the right to buy or sell their chosen stock by the expiration date. They can also choose to sell the option to another trader. In an options chain, the bid and ask prices are critically important for traders. 

The bid price is how much a trader should theoretically be able to sell their option for on the open market on that particular date. The ask price is how much another trader should theoretically be able to buy a particular option on that given day. In an options chain, the bid and ask price will appear next to each other, with the bid price listed first. 

Bids Quantity and Asks Quantity

The bids quantity in an options trading chart is a measure of how many buy orders exist for a given stock at a particular strike price. The ask quantity is a measure of how many sell orders exist for a given stock at a particular strike price. Understanding this can give investors valuable clues about which direction the market thinks a particular stock is going. 

A stock with a high bid quantity at a particular strike price is indicative of high demand for a stock at that strike price. Generally, that would indicate that investors believe the stock will be moving up from that strike price, and they believe they will be able to sell their shares at a profit. 

Open Interest (OI) and Change in OI

Open interest in an options chain reflects how many call or put options there are for a given stock at a particular strike price. If you’re reading the calls section of an options trading chart for a stock with a strike price of $150 and the open interest column shows 125, that means there are 125 options open that you could theoretically buy at or around the listed ask price.

A change in open interest means that an option has been added to the market for sale (in which case the OI will increase based on the number of available options) or has been purchased by another trader (in which case the OI will go down based on the number of options purchased).

 As a general rule, the higher the level of open interest there is in a particular option, the easier it will be for the options trader to sell that option to another investor. If there are 500 call options at $100 and 10 call options at $150, it will be much easier for an options trader to sell the options at $100. 

Volume

Volume is a measure of how many call or put options have been traded in a particular trading day. It is a key indicator of how easy or difficult it may be to liquidate a particular option. If you are reading an options chain and look at a strike price of $100 and see a trading volume of 1,000 for that day, there is a great deal of interest in the option at that strike price. 

If you’re holding options for at or near $100 at that time, it will likely be easier to move those options. By contrast, if you’re holding options at a strike price of $150 and the trading volume is only 10, that means there isn’t a great deal of interest in your option that day, and selling or liquidating that option could prove to be difficult.  

Implied Volatility

Implied volatility (IV) measures the overall level of interest in a particular option at a specific strike price. The implied volatility of an option can change over time as options approach their expiration date or the market’s expectation of a stock goes up or down. 

Generally, the more implied volatility is for a particular option, the more interest there is in the option at that strike price. This will drive the premium price upward. A low level of implied volatility means an option is not highly desired by traders, and the premium will reflect that. 

Last-Traded Price of an Option

The last-traded price (LTP), which also appears as “price” in an options trading chart, is the last-traded price of an option for a particular strike price. For example, if a call option has a strike price of $100 and a price listing of $65, it means the most recently sold $100 call option traded for $65.

Net change

Net change measures the difference between the closing price of the stock the trader has an option on from one day to the next. If a stock closed at $100 on Tuesday but is selling for $105 at noon on Wednesday, there is a net change of $5 per share.

Option Greeks

Option Greeks are formulas reflected in Greek letters to measure how market changes and other factors could impact an option’s premium. Option Greeks do not appear on all options trading charts, but when they do, there are four major Greeks to consider:

• Delta measures how much an option premium price will change for the first dollar the underlying stock price moves. For an option with a Delta of 0.3, the option’s premium price moves up 30 cents for every $1 the price of the underlying stock goes up or down.
• Gamma measures an option’s predicted rate of change. Adding Delta to Gamma will give traders an idea of how much to expect an option price to move for each subsequent dollar move made by the underlying stock. A Delta of 0.3 and a Gamma of 0.0 would translate to an option moving 0.36 for the next dollar the premium moves.
• Theta measures how much value an option loses on a daily basis as it approaches its expiration date. If an option with a $100 premium has a Theta of negative 0.05, the option will decline in value by 5 cents every day, not accounting for other factors. 
• Vega estimates how much an option’s premium will change (up or down) based on its implied volatility. If the Vega is 0.05, and the implied volatility goes up by 2%, the option’s premium price should theoretically increase by 10 cents.

How to Find Options Trading Charts

Aspiring options traders can find options trading charts in a variety of places. Many brokerage websites or investment publications will have option chains available for viewing in their online or print editions.

Reading the Tea Leaves in Options Trading Charts

Options trading charts are the investor’s version of the advanced analytics that coaches, players and general managers use to improve their teams’ performance on the playing field. Every option chain tells a story, and the better investors are at reading that story, the better their chances of making a good investment are. 

The key thing to remember with options trading charts is that they are a language all to themselves. As is the case with learning any language, it takes time, patience and practice. If you take the time to learn that language and become fluent, you can give yourself a leg up in the world of options trading and generate some impressive returns in the process.

Frequently Asked Questions