What is an option chain?
An options chain, also known as an options matrix, is a list of all available option contracts, both put options and calls, for a given security. It displays all information about put options, calls, strike prices and prices for a single underlying asset during a given maturity period.
Understanding the chain of options
Option chains are probably the most natural form of reporting for most retail investors. The option quotes are listed in an easy to understand sequence. Traders can find an option premium by following the due dates and corresponding exercise prices. Depending on the presentation of the data, bid-ask quotes, or mid quotes, can also be displayed in a chain of options.
The majority of online brokers and stock trading platforms display option quotes as a chain of options using real-time or deferred data. The chain view allows quick analysis of activity, open interests and price changes. Traders can refine the specific options required to meet a particular option strategy.
Traders can quickly find the trading activity of an asset, including the frequency, trading volume and interest by strike price and maturity month. Data can be sorted by expiration date, from the earliest to the most distant, then refined by exercise price, from the lowest to the highest.
Key points to remember
- An options chain, also known as an options matrix, is a list of all available option contracts, both put options and calls, for a given security.
- The option chain matrix is most useful for the next trading day.
- Traders typically focus on the “last price”, “net change”, “supply” and “demand” columns to assess current market conditions.
Decoding the option chain matrix
The terms in an options matrix are relatively self-explanatory. A skilled user can quickly decipher the market for high and low price movements and liquidity levels. This is essential information for efficient business operations and profitability.
Traders focus on four columns of information to assess current market conditions. The columns are Last Price, Net Change, Bid and Ask.
- The last price column displays the last commercial price entered and reported.
- The information in the net change column reflects the direction (upward, downward or flat) of the underlying asset, as well as the amount of the price difference from the previous transaction.
- Examination of the auction column shows information on the amount an operator could expect to receive on the sale of this option at that time.
- Information on the amount the merchant can expect to pay to purchase this option at that time appears in the request column.
In the columns following the four listed above, you will find important information for assessing the size of the market for a given option and how traders are engaged at each price level.
The volume of transactions, or the number of contracts that change hands during a given day, indicates the level of liquidity that there could be for a given option. Open interest measures the total number of options outstanding at each strike and at each maturity date, which allows you to measure the extent of market engagement.
The actual level of open interest varies intraday. Market makers do not report the information in the option chain until the end of each trading day. The option chain matrix is most useful for the next trading day.