Learn how to translate the specialized options tools you can find online.
Instead of options tables, many websites offer options chains or options strings. You select a particular underlying instrument, and can see a chain of all the options currently available, so that you can compare the prices for calls and puts, different strike prices, and different expiration months.
Also, you can choose whether to display all option strike prices, or only those that are in-the-money, at-the-money, or out-of-money, or any combination of the three. You can also select the expiration months to be displayed and whether to include LEAPS or not.
In addition to price information for each contract that appears in the option chain, you’ll find its theoretical value, implied volatility, and a calculation for each of the Greeks.
Options chain terms and definitions
Understanding bid and ask
The bid is the price that a buyer is willing to pay for an option, and the ask is the price that a seller is willing to accept. In general, the two prices are slightly different, and the gap between them is known as the spread. So how does that affect individual investors?
When you buy or sell an option—or a stock — you’re possibly buying from and selling to a market maker. One role of market makers is to provide liquidity in the marketplace, making it easier to buy or sell one or more options without changing the market price. One way market makers can profit is by buying options contracts at the current bid price and selling them at the higher ask price. Without a change in the underlying stock price, they may make a profit from the spread of only a few cents per contract. But they may trade in high volume every day, so the small profits can add up.
As a rule of thumb, the more actively traded an option is, the smaller the spread will be. But the bid and ask spread for any particular option contract may vary on the different exchanges where the contract is listed. So option brokers focus on getting their customers the best execution price among the various exchanges where the option is traded.
How To Use Options Chains? by Inna Rosputnia
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