If you’re new to options, one of the key things to understand is the option chain.
This is where you’ll find available options contracts for calls and puts for most stocks, as well as the strike prices and pricing information. As Robinhood explains it:
An option chain is like a restaurant menu. It tells you what is available and for what price. Like most menus, they generally look and feel the same. But, depending on which restaurant you dine at, certain things may look different, or be arranged differently. Sometimes you can only read a menu, but once you’re seated you can order food from your server. When you decide what you want to order, you can choose one item, or a combination of items to create your meal.
To familiarize yourself with an option chain, pull one up for Apple (AAPL) for example.
On the chain, pay close attention to every column:
- Volume: Tells you how many options contracts were traded in the most recent session. The higher the volume, the more liquid the option.
- Last price: The last traded price of a particular option.
- Strike price: Your target price. It’s where you expect the stock to trade at or above over a set time frame. For example, if I were to buy to open the AAPL August 20, 2021 140 call, I expect for AAPL to trade above that price on or before August 20, 2021.
- Puts and calls: As we’ve previously covered, you want to buy a put if you believe the underlying stock is heading lower. You want to buy a call if you believe the stock is heading higher.
- Closing price: Where the option closed on a given day.
- Bid and ask price: The bid price is the price someone is willing to pay for the option. The ask price is the lowest price someone is willing to sell an option for, according to Robinhood.
- Open interest: Tells you how many contracts are open to date. These also tell us how many contracts have not been closed or exercised.
Feeling overwhelmed? Don’t! I promise, all of these terms get easier with practice.
Note: This article originally appeared at Investors Alley.
