If you are an investor or trader interested in tapping into the options market, you will need to understand the basics of option chains to make informed decisions. This beginner’s guide will take a closer look at option chains and outline everything you need to know to start trading options confidently.

What are Option Chains?

An option chain is a list of available options for a particular stock or other underlying assets such as indexes or commodities. The list consists of all the available options contracts for different expiration dates and strike prices.

An options contract is an agreement between two parties to carry out a transaction involving the underlying asset at a predetermined price and date. The option holder acquires the right to buy or sell the underlying asset at the contract’s agreed price, while the option seller must fulfill the obligation if the option holder exercises the option.

Understanding the Option Chain Layout

Option chains are arranged in a chart format which makes them easy to read and understand. The option chain has three columns with each column representing different components.

Strike Price

The first column, Strike Price, lists all the available strike prices for the underlying asset. The strike price is the predetermined price at which the transaction is made within the contract.

Expiration Date

The second column in the option chain represents the expiration date. This column shows the date when the contract between the two parties lapses or expires. After this date, the contract becomes null and void if the option holder has not yet exercised their right.

Option Prices

The third column in the option chain shows the option prices. The prices are divided into two parts: the bid price and the ask price. The ask price indicates the lowest price that the option seller is willing to accept for the option, while the bid price indicates the maximum price that the option buyer is willing to pay for the option. The difference between the bid price and the ask price is the option’s spread, which forms part of the option’s cost.

Understanding Call and Put Options

Call and put options are two types of options contracts available on the options chain. Investors and traders use these options to generate returns and hedge against potential losses.

A call option is an option contract that grants the buyer the right to purchase a particular stock at a predetermined price. This option can be purchased when the investor expects the stock price to rise above the agreed price. The seller of the call option must sell the stock to the buyer at the predetermined price if the option is exercised by the buyer.

A put option, on the other hand, is an option contract that grants the buyer the right to sell a particular stock at a predetermined price. This option can be purchased when the investor expects the stock price to fall below the agreed price. The seller of the put option must buy the stock from the buyer at the predetermined price if the option is exercised by the buyer.