How To Read Options Like A Pro In 6 Simple Steps

Jun 8, 2024

Person Using Laptop for Trading - How To Read Options

Trey Munson

Option Trading Strategy

Are you struggling with the confusion of the Options Trading Strategy, especially when it comes to learning how to read options effectively? Understanding the variation of options trading can be challenging. By diving into this guide on 'How to Read Options,' you'll unlock valuable insights and gain the knowledge needed to successfully explore the world of options trading. 

Whether you're a seasoned trader looking to refine your skills or a beginner eager to learn and do options online, this guide will provide essential tools to boost your trading game.

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Table of Contents

What Is Options Trading?

Person Doing Trading on Laptop - How To Read Options

Options are versatile financial products. These contracts involve a buyer and seller, where the buyer pays a premium for the rights granted by the contract. Call options allow the holder to buy the asset at a stated price within a specific time frame. Put options, on the other hand, allow the holder to sell the asset at a stated price within a specific time frame. 

Each call option has a bullish buyer and a bearish seller, while put options have a bearish buyer and a bullish seller. Traders and investors buy and sell options for several reasons. Options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying asset shares. Investors use options to hedge or reduce the risk exposure of their portfolios.

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How To Read Options Like A Pro In 6 Simple Steps

Person using Mobile for Trading - How To Read Options

1. Calls and Puts

Options chains are listed in two sections: calls and puts. A call option gives you the right (but not the obligation) to purchase 100 shares of the stock at a certain price up to a certain date. A put option also gives you the right (and again, not the obligation) to sell 100 shares at a certain price up to a certain date. Call options are always listed first.

2. Expiration Date

Options have various expiry dates. For example, you could buy a call option on a stock expiring in April, or another expiring in July. Options with less than 30 days to their expiry date will lose value quickly, as there is less time to execute them. The order of columns in an option chain is as follows: strike, symbol, last, change, bid, ask, volume, and open interest.

3. Strike Price

The strike price is when you can buy (with a call) or sell (with a put). Call options with higher strike prices are almost always cheaper than lower strike calls. The reverse is true for put options—lower strike prices also translate into lower option prices. With options, the market price must cross over the strike price to be executable. 

4. Premium

The last price is the most recent posted trade, and the change column shows how much the last trade varied from the previous day's closing price. Bid and ask to show the prices that buyers and sellers are willing to trade at right now. Think of options (just like stocks) as big online auctions. 

Buyers are only willing to pay so much, and sellers are only willing to accept so much. Negotiating happens at both ends until the bid and ask prices start coming closer together. Finally, either the buyer will take the offered price or the seller will accept the buyer's bid, and a transaction will occur.

5. Fluctuation

The option's premium fluctuates constantly as the price of the underlying stock changes. These fluctuations are called volatility and impact the likelihood of an option being profitable. If a stock has little volatility, and the strike price is far from the stock's current price in the market, the option has a low probability of being profitable at expiry. 

6. Open Interest and Volume

While the volume column shows how many options are traded on a particular day, the open interest column shows how many options are outstanding. Open interest is the number of options for a stock and includes options opened days prior. 

Open interest is important because investors want to see liquidity, which means there's enough demand for an option so that they can easily enter and exit a position. 

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What Is In-and-Out-of-the-Money Options

List of Cryptocurrencies - How To Read Options

In-the-Money Options

In-the-money (ITM) options have intrinsic value and are priced higher than out-of-the-money (OTM) options in the same chain. They can be immediately exercised. For this reason, both call and put options can be either in or out of the money and this information can be critical when deciding which option to invest in. 

In-the-money options have strike prices that have already exceeded the current market price and have underlying value. In other words, the premium for the option also plays a role in determining profitability. 

For example, if the $35 strike option had a $5 premium, the option wouldn't be profitable enough to exercise or cash out even though there's $2.50 in intrinsic value. It's important to factor in the cost of the premium when calculating the potential profitability of a trade.

Out-of-the-Money Options

If an option is out of the money, the strike price hasn't yet crossed the market price. You are essentially betting that the stock will go up in price (for a call) or down in price (for a put) before the option expires. If the market price doesn't move in the direction you had hoped, the option expires worthless.

How To Read An Option Symbol Easily

Person Holding a Mobile Phone with Trading App Operned - How To Read Options

1. Root Symbol

The root symbol, also known as the ticker symbol, represents the underlying stock on which the option is based. For example, The option symbol YHOO150416C00030000, "YHOO" is the root symbol, indicating that the option is linked to Yahoo stock.

2. Expiration Year

The expiration year refers to the year in which the option contract expires. In the option symbol YHOO150416C00030000, "15" represents the expiration year 2015.

3. Expiration Month

The expiration month denotes the month in which the option contract expires. In the option symbol YHOO150416C00030000, "04" signifies the expiration month of April.

4. Expiration Day

The expiration day specifies the day on which the option contract expires. In the option symbol YHOO150416C00030000, "16" indicates the expiration day of the 16th.

5. Call or Put an Indicator

The call or put indicator denotes whether the option is a call or put option. In the option symbol YHOO150416C00030000, "C" signifies that it is a call option.

6. Strike Price

The strike price refers to the price at which the option holder can buy (in the case of a call option) or sell (in the case of a put option) the underlying stock. In the option symbol YHOO150416C00030000, "00030.000" represents a strike price of $30.00. The decimal point in the strike price falls three places from the right.

Reading an Options Symbol

When you come across an options symbol like YHOO150416C00030000, you can interpret it by breaking down the components as explained above. By understanding each part of the symbol, you can decipher crucial information such as the underlying stock, expiration date, call or put option, and strike price. 

This insight can help you assess the option's trading information, including bid and ask prices, trading volume, and the day’s trading range. With this knowledge, you can make well-informed decisions when trading options.

How To Read An Options Table Easily

Person Holding Mobilephone with Trading App Opened - How To Read Options

Underlying Security Symbol

The first column of an options table provides a symbol of the underlying security. This symbol represents the company or asset associated with the options contract.

Expiry Date Information

The Expiry Date column shows the expiration date of the options contract. This date is crucial as it indicates when the contract will expire and no longer be valid for trading.

Strike Price Analysis

This column lists the Strike Price of the options contract. The strike price is the price agreed upon per share for purchasing or selling the underlying shares upon exercising the options contract. This guides you on the price of buying or selling the underlying asset.

Identification of Option Type

The Type column specifies whether the options contract is a call (C) or a put (P). A call option gives the holder the right to buy shares, while a put option gives the holder the right to sell shares.

Understanding the Bid Price

The Bid column indicates the highest price someone is willing to pay for the options contract. This is the maximum price that buyers are willing to pay to obtain the contract.

Understanding the Ask Price

The Ask column displays the lowest price at which someone is willing to sell the options contract. This is the minimum price sellers will accept when selling the contract.

Volume of Options Traded

The Volume column in an options table indicates the total number of options contracts traded during the day. This figure helps gauge the activity level for a specific options contract.

Open Interest Calculation

Open Interest represents open positions, the number of options contracts still in effect and has not yet been exercised. This data gives insight into the number of active contracts in the market.

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