How to Read Options Chains – The Easiest Solution to Get Started Fast
If you’re new to trading options, one of the first questions you’ll often have is, “How to read options chains?”
And if you aren’t used to looking at them, they can be pretty confusing as there’s a lot more going on there than if you’re trading regular stocks.
But it’s something that you have to be familiar with and comfortable reading if you’re going to trade options.
And is it worth the work?
I say that it is, as trading options gives you a chance to risk a little in order to potentially make a lot.
And, well, there are so many more options that you have when you’re.. ah, well, trading options 🙂
So let’s get into this so you can become an expert options chain reader in no time.
And the quickest way to do that is to pull up an options chain and dive right in.
How to Read Options Chains
To get going, let’s look at the options chain below for Tesla.
Right off, you can see that Tesla’s currently trading at $454.20 – and so this isn’t any different than if you were trading stocks.
The next thing of note is to look at the 2 columns at the top labelled “CALLS” and “PUTS” as you can see below.
Calls and Puts are the foundation of trading options.
If you buy Calls, you are buying the right to buy the stock at a certain price. You don’t HAVE to purchase it at this price, but you have the option or right to do so if you wish.
Puts, on the other hand, give you the right to sell the stock at a certain price. Again, you don’t HAVE to purchase it at this price, but you have the option or right to do so if you wish.
For our attempts here – and to keep things super simple – I’m only going to cover buying calls and puts for now (you can sell them as well, but that’s more of an advanced thing and for now we’ll just leave it alone while you’re learning the basics).
As I’m sure you’re beginning to see, there are a number of things to understand when you’re trying to learn how to read options chains.
The next thing you want to look at is the strike price.
The strike price is the price at which you can either buy or sell the stock.
So, using our basic example of only buying options, if you were to buy calls, and the strike price is lower than the current trading value of the stock (in this case if you were to buy the 446 strike calls and Tesla is trading at 454.39) then your call option is said to be “in the money”.
On the other hand, if you were buying put options and bought the 455 puts while Tesla was trading at 454.39, your put options would be “in the money.”
And when you’re buying options, you want them to be “in the money” at the option expiry date.
So if you’re buying calls, you’re basically saying that the price of Tesla stock will be higher than the strike price you purchased the option at come the expiration date.
If you’re buying puts, you’re saying that the price of Tesla stock will be lower than the strike price you purchased the option when it expires.
Something To Keep In Mind
The closer the strike price is to the current trading value of the stock, the more expensive buying the call or put will be.
The next thing that you will want to look at is the option expiration date, which you can see in the image below.
This is the date when the option contract you buy expires. So this is the date by which you need the stock price to be trading at or above the strike (if you buy calls), or at or below the strike (if you’re buying puts).
Now that we’ve got that out of the way, we need to be able to identify what it will cost you to buy 1 option. And this is easily done when you’re reading an options chain and it really isn’t much different than when you’re trading stocks.
What you want to look for is the “BID” and “ASK” prices on either the Call or Put side.
So if you are wanting to buy some “out of the money” calls on Tesla, let’s say you’re looking to buy the 460 strike Calls. The cost for this would be between the Bid and Ask price (just like when trading stocks) and is generally somewhere in between the Bid and Ask. So in this case, it would probably cost you $1.57/contract.
With options, each contract typically controls 100 shares of stock, so your total cost would be $1.57 x 100 shares = $157.
So for $157, you are saying that by October 16th the price of Tesla will be at or above $460. And if it is, the price of the Calls you bought will increase in value and you’ll make money.
It’s the same process on the Put side.
If you thought the price of Tesla was going to drop to 450 or lower by October 16th (the option expiry date), you could buy the 450 strike Puts for $185 ($1.89-1.80/2, 0.05+1.80, x 100 shares).
And then if the price of Tesla dropped to 450 or lower on October 16th you would make money.
So , these are the basics of how to read options chains using simple, directional options trades when buying Calls or Puts.
And these are the exact sort of trades that we use inside “The Empirical Collective”. We issue simple, directional trade alerts for buying Calls or Puts to our members, making them really easy to follow and execute for traders of any experience level.
On the other hand, if you’re ready to go and want to start trading, you can sign up for an account inside “The Empirical Collective” and trade along with us by clicking this link here.
We’ve had some great success making these simple trades – 94% winning average and an average return of over 24% per trade as you can see here – and if you’re looking to start making some money asap this is a great place to do it. You can join using the discounted link here.