subject: Learn to read option chain [print this page] Learn to read option chain Learn to read option chain
If you want to make money from trading option, you need to know first how to read option chain. That is the basic skill if you want to trade options. Not knowing how to read option chain is just like not knowing how to read price tag.
I have uploaded an image about option chain from optionXpress. You can see it above this article. It is an option chain example for MCD (McDonald). The option chain is for Call option which expires in April 2011.
First you can see that there is only 11 days to expiration and current MCD price is $76.47. There are several strike prices for that Call option which will expire in April 2011. The strike prices range from $67.50 to $85.00. The first thing that you notice is maybe the yellow background color. It shows In the Money (ITM) option. ITM for Call option means current price is higher than strike price.
Here are some explanations from the image column above:
Last -> the last price it traded
Chg -> shows how much the price has change from previous closing price
Bid -> the option price that a buyer is willing to buy
Sell -> the option price that seller is willing to sell
Vol -> shows how many option contracts are traded today.
OpInt -> show how many options are still open.
There are a couple of things you can conclude from the image that can help you invest in option. Notice that the higher the strike price the lower theoption price. This is because ITM option has intrinsic value. Pay attention to the option with $70 strike price. The intrinsic value for that option is $76.47 - $70 = $6.47. You see that the intrinsic value is between the Bid and Ask value. We can assume that the time value for the option is 0 or almost 0 since it is only 11 days to expire. Buyer want to buy lower than $6.47 and the highest price a buyer want to buy is $6.35. Seller want to sell higher than $6.47 and the lowest price a seller want to sell is $6.55.
You can also see that Out of Money (OTM) option is very cheap. You can buy the $80 strike price with only 6 cents or $6 per contract. With only 11 days to expire, you only have very little time to make money. That's why it is so cheap.
