Hey, this is Sasha Evdakov. Welcome to this educational post on the options chain and reading an options pricing table.
I'm going to share with you how to read an options chain on the thinkorswim platform.
I like using this platform because:
- you can increase and reduce the font size
- and it's a useful teaching tool
Getting Started - Trade Section
To get to the options trade, grid or options chain or pricing tables you go into the trade section. And then all the products. If I type in my ticker symbol here at the top (Microsoft for example), then there's the options chain.
There's a trading grid right under there. But we're looking for the options chain. That's how you read the options. Usually, that's how you will see them. They'll layout by date. If I type in Amazon (AMZN) or Google, then you see those.
Tesla As an Example
Let's use Tesla for example. You can see I have the options chain open by clicking that arrow.
That arrow right there and that will open up that options chain. Certain brokers allow you to sort options by category. Here I have a standard single. I could sort it by vertical, by a straddle and strangle, and a butterflying.
You don't see any of the differences right now, but you will see them here shortly in just a minute. You'll notice that the options are sorted by months and days.
For example, you have:
- August 18th expiration is with 78 days to go
- December 15th expiration with 197 days to go
Then over on the side, you might have something where there the non-standard option or there go weekly in this case.
On the right side here is the volatility. And that's a plus or minus a certain amount as well. But this is the volatility of those option spreads. You'll see that some of them like these in the forties are a little bit higher volatility than the ones closer.
Let's say that you're looking at the 50-day options. You would open up this July, and you'll see the 50-day options. When you start this process off, it's a little bit confusing. Let me redo some of these strike prices. Let's be 20 right here and go to even 15 or 10. When you look at this, you'll notice that we have 50 days to go.
We're currently in June 2017 on a Thursday. You can see that you have two main concepts here. You have the calls and the puts.
The left side typically is the calls, and the right side is the puts. How do I know that? Well, you can read it at the top. Sometimes it is difficult to find that but if you're familiar with your trading panel that shouldn't be a problem.
Calls are typical if you buy a single call. They're typically used for an upside direction. It's like buying a contract, predicting or projecting that a house price is going to go up.
The same thing on the put side except you're projecting it for the downside. If you purchase a put, you're looking for a short sale. Keep in mind there's four parts or four sides to any of these options trades. You could be a buyer of a call, or you could be a seller of a call. And you can be a buyer of a put and a seller of a put.
If you're buying a call, you're looking for it to go up. If you are buying a put, you're looking for the stock or equity to go down. Next, to our date, you'll have the strike prices. Tesla right now is trading at 340.49, and these are the strike prices.
If I'm looking to buy a call at 360, this says that I have my 50 days to go that it needs to hit about 360 for it to be worth anything.
Quick question: Can it move a lot quicker and you get out of it sooner?
Yes, you can do that.
It can go up to 360 in one day you can get out of it. And this price that you pay is going to be worth more. Right now you would pay 10.45 for that contract multiply by 100 because each contract controls 100 shares.
You're not paying a 10.45. This is what a profit picture looks like on a call contract. What this does is show you profit and loss on a call contractor or your position.
You're looking on the bottom for the prices. Then on the left and right what you have is your profit and loss. The white line right here is your current date that your positions at. And the Green Line is at expiration. As time moves forward and as I shift and adjust the time you can see what happens to my theoretical profit and loss.
Because as you know, time decayed when it comes to options. There are my current profit and loss. Let's reduce these additional slices which are the plus or minus 10%.
As I move and shift the time forward, you can see that white line get closer and closer to the green line towards expiration. That's what happens with a primary call option. You can see the theoretical concept. If you buy a call, you're looking forward to going up.
If I do the same thing on the put side, this is what happens. Let's say I project that their stock is going to go down. I could buy the 320. We'll do the single, analyze the trade and you can see what happens as the stock goes down my profit heads higher. My profit increases as a stock go to the downside.
My profit loss can increase in one single day. And that's okay. Even if it goes in two days to three days, I might lose a little bit on the time value of that option. But if it jumps $10 to the downside, I'm profitable $270.
Can I get out early? You can get out early. You can get out as soon as you want. You could get out in two seconds if you wanted to. But that's the way the put side works.
What Else Is There On a Trade Grid?
Well, you have the bid and the asks. This is the bid and asks on the puts and the call side.
If you're looking to buy a call, you're going to be paying the asking price. Or maybe somewhere in between the bid and the ask if you can get a negotiated rate. You're going to be getting that asking price if you're a seller. It depends on where you want to sell it at on your strike prices.
Let's say you're going with 360. You're trying to sell it at 10.50, but you might only get 10.30. That's the case because people are trying to buy it at $10. Somewhere in the middle is what you might end up paying.
If we buy a single (the natural price is 10.50 the mid-price is 10.40), you might be able to get somewhere in between this level.
The prices are constantly shifting. That's called the bid-ask spread. That's that range that you're paying. You can see some of these have a wide bid-ask spread. And others if you look at SPY - it have a very tight. We see these are 1 cent bid-ask spread. It's very minimal.
Whereas if you look at SPX bid-ask spread is a whole dollar. You can see the difference here on looking at different option prices, but the range is diverse.
Let's go back to our Tesla example
You take and decide which one do you want to buy. There's a lot of different ways that you can decide depending on what you want to do. But the other thing that you want to watch for is the open interest.
Here we have the open interest that tells you how many open contracts are out there on that set. This would be the call side. If you look at the open interest on the put side if that's your open the interest on this side.
The probability of in the money is the percentage that I have up right there. That's the probability of in the money of it working out in your favor. Or these becoming valuable. You can change these of course. I could change these columns to the Delta.
The Delta - the move that I make on a per dollar move on the stock. I could say let's look at the volume for today. I could change it to let's look at the Theta. How much Theta am I going to lose on each one?
You can look at implied volatility. You can do a lot of different column changes and adjustments within these things. But for me typically what I do is I look at the probability of in the money. Then the other thing is the open interest. Just because I want to see how liquid things are.
With that being said you can also adjust the strike prices. If you want to see 14, you could change it to 14. If you're going to see 100, you could see 100. You'll notice that on the right there at the money this is what typically people call at the money.
When there's something worth a dollar amount at expiration, notice that this color is a little bit more purple. So all of these call contracts are worth something already.
They have that value, and they are in the money. The same thing on the put side. Anything below that range you can see these are worth something.
And in the call side, anything in that range came the orange range those are worth something. Everything else is basically out of the money. Here in yellow (the put side) those are out of the money. Typically those are the ones you'll trade. Those are a little bit more of what people will trade, put positions on.
You also can change from a single spread to a vertical. Now what they'll do is you'll notice start making changes to these strike prices. It's possible for you to do a vertical on the 320-325. If I go further out, I could be seventy-eight days same thing.
I could change this to a calendar. Now you'll notice there's a big difference. I'm saying this because now they put together calendars on the 50 and 78 days. I could do a calendar on the 360, 350, 335.
You can see that you can adjust these positions or the pricing table based on the way you trade.
Even if I'm putting on a calendar, I'll go to the 350 strike price, and I'll buy a calendar. I'll select that, and then I can analyze the trade. Let's get rid of that single position. Now I can adjust my prices if I want to move that calendar around.
But with that being said that's pretty much the primary pricing table or the options chain and how it works.
Quick Step by Step Reminder
Focus on these steps:
- You go into all products
- You type in what you want
- You have the calls (on the left)
- You have the puts (on the right)
- You can define the number of strike prices
- You choose how many days out you go
If you're looking to trade far out on your options, you can choose that as well.
Let's say we go 141 days. If you're doing single contracts that are buying a call you're looking for the stock to go up you're purchasing a put. You're looking for the stock to go down. You get to choose the strike price.
Does it matter which one you choose in terms of your getting out within a day or two?
There are advantages because the closer you get in the money right where the current price is the faster it moves.
If you go out a little bit wider, you pay a little less, but you still capitalize on that option.
How to Buy a Single on the Amazon?
Let me show you an example by buying a single at the 10.40 on the Amazon. And let's make it a live price go to today. You can see for every dollar move that this stock moves to the upside I make 47 dollars.
That's what the Delta tells you. If I go to 10.70, I only make $40. Can I trade one or the other> Yeah absolutely, it doesn't matter if you had no preference and no risk preference.
But the one on 10.70 you spend $3150 and you make $40 for every one dollar move in the stock. For the one at the 10.40 level, you're going to spend a little more $4180, but you make an extra $7 for every $1 move in that stock.
In either case that's how it works in the option position. The more money you spend, the more you make on a per dollar basis.
If you're doing the same put kind of concept. We can look at this put, and you're looking at the 9.70 put. Then I could put this on. Now you're starting down $800 because of the bid-ask spread and Amazon is enormous.
But in general, as that stock goes down, you're making $33. That's a negative because you want it to go down. You make $33 for every dollar move. That stock gets to 9.50 - you're profitable about $1,900. That doesn't happen in a day. Let's say it takes you a week. You lose some money on the theta.
That's what theta tells you - how much money you lose on a day-to-day basis. But you're still up about $1500 if that's within a week or two.
Final Thoughts on The Strategy
Maybe you're looking to go further out, and you don't have that kind of capital. You scroll on a trade let's say Amazon. You can open this up to two hundred strike prices.
You could do the 800 even though the stock is trading at 994. You could do the 800 because you'll spend less. After you go to the 800, you can see it's far out. But look how much you're risking. Instead, the $3000-$4000 you're risking $670.
But your Delta - you're only making $8 for every dollar move down that stock goes.
The call side: You can do the same thing on the call side. Let's say I change this to the call side and instead of doing it close I go to the 1250 or 1300 calls.
It's not as realistic for it to go up in one month, but you can hold it for how the long you want to. But instead of spending $3,000 you're spending #255. And you're getting $4 for every dollar move in their stock.
As that stock heads higher, you're getting $4. Keep in mind you're losing $4 on a day-to-day basis. You need that stock to keep heading higher $1 every day to break even.
Keep that in mind. But if the stock explodes and they pops 20-30 points in a day, you could make pretty good money. With a single option, there's that time decay problem.
That's how basic options work on a pricing table. That's what you're looking at. You've learned how you look at some options pricing tables and some strike prices. Also, you've seen the right way of starting to look at options.
In this post, you've learned how they work between the bid-ask spread, the open interest, and how you start looking at contracts.