Looking for your next stock trade option chain ?
Or simply planning a trade and would like to compare the cost for multiple stocks ?
No matter the case, this stock option tutorial will help you navigate through most option chains by providing some key insights to avoid the snares of retails options buying and selling.
We will use SPY Option Chain, AMD Option Chain and others to guide you on what to look for, why to do so and where to get the right insight on your favorite stock option chain.
Table of Contents
SPY Option Chain: What To Look For ?
Maybe you area newcomer to options trading. In which case the most important information on an option chain is the prices of the options you are considering.
But Option chains provide more than the cost of options currently traded.
Let’s take a look at what more you need to be looking for through some examples.
In the above SPY Option Chain taken on January 14, 2020, in pre-market, I would like to highlight the most important indicator in an option chain.
No, it is not the prices.
Options Implied Volatility
Rather, the Implied Volatility chart on top.
After the price of the stock and Theta, Implied volatility is the most important factor in options pricing.
The market makers do manipulate it at will to serve their own interest.
Do you know that you can have calls on a stock that has gone up and still be loosing money because you bought those calls at the time when the Implied volatility was jacked up by the market makers ?
Try wrapping your mind around that one before gambling on Pre-Earnings 🙂
Back to the SPY Implied volatility. It is very low AND it is flat within a whole month.
Low Implied volatility are the ones below 30 percent.
In the Money vs Out of The Money Options
The key takeaway here is that when considering if the options you are buying are expensive or not, you need to know the historical Implied Volatility.
Otherwise, you are bound to jump into a bad position solely for not knowing about this key parameter.
The other most common gaffe for options buyers is the confusion between the Calls and the puts chains.
On our SPY option chain, we know these are calls because we shared in this tutorial that calls always have a positive delta.
In green, In the Money(ITM) options because their strikes are lower than the current price.
In orange, we have highlighted Out of The Money (OTM) SPY options because their strikes are higher than the current price.
So ITM and OTM options are in reference to the current price of the stock.
If strike is above current price of the stock, it is an out of the money option, otherwise it is an In the Money option.
SPY OPTION CHAIN: Example of a Monthly Option Chain
Unlike SPY who features daily, weekly and monthly expirations, certain stocks only have monthly expirations.
I have always found it advantageous to trade stocks with only monthly options.
Especially if I were to enter the position after Earnings with 3 weeks or more remaining before the expiration date.
Here is why.
Though not as explosive as daily or weekly options to a lesser degree, monthly only expirations provide risk protection through time.
If we take a look at the February 2020 85 calls price for Dominion (Ticker: D) shown above, we know that their value does not decay in the first week even if the price goes down a bit.
The reason for that is that there is so much time left before expiration.
In case stock moves favorably in the first week after entry in the position, time premium makes it really attractive to hold for higher profits.
Traders can leverage time premium on monthly only expirations.
In some cases, I have witnessed huge payouts on the last week of a monthly option.
I can vividly remember Nutanix (Ticker:NTNX) stock as one good reference to this observation back in 2018 and part of 2019.
Other Popular Option Chains
Some of the most liquid options out there can be found on AMD Option Chain, Apple Option chain and MSFT Option chain just to name a few.
The popularity is seen through the Volume and Open interest of course.
Though, I can not emphasize enough what occur as Earnings for these stocks approaches, Implied Volatility always spiked upward.
In the case of AMD Option chain, it is not rare to see near the money options with over 150% Implied volatility.
See the video below on how to place a Trade on Power Etrade.
Of the three, MSFT Option chain up to this year was the one not to witness such huge numbers.
Now that Apple is trading above $300, only time will tell that AAPL option chain will become in regard to pre-Earnings Implied Volatility.
The likes of NFLX and TSLA are not for the faint of heart at anytime left alone before Earnings.
Best places to Find Options Chains
The best place to read option chains is inside of a broker platform.
We are assuming such broker provides a full option chain list of variables.
We have the standard : Contract Name with date of expiration, Last traded price, the strike, the bid, the ask, the %change, the volume, the Open Interest.
But that is not enough: You must be able to have access to all the Greeks or at least to Theta and delta.
That is still not enough: The Implied Volatility is Essential along with the Implied Volatility change % during he Live trading session.
You often hear the saying about the stock market: “Buy Low, Sell High”.
“Buy in Low Implied Volatility, and Sell in High Implied Volatility” is the option equivalent.
That is why the Implied Volatility %change helps you know how much the Implied Volatility has moved up or down during the Live session.
You would want to sell your profitable positions when the Implied Volatility %Change is the highest.
Based on these criteria, only one of the places below provide the extra parameters.
Big Charts from MarketWatch
Their options chains have a long and big fancy layout showing way Out of the Money strikes but nothing on the Greeks and Implied Volatility.
You have a yellow color to highlight the In The Money Calls and Puts.
But that is it. There is no advanced parameters after the Open Interest.
In case you are wondering what is the difference between NASDAQ option chain and NSE (New York Stock Exchange) Option Chain, it is good to know that certain companies are listed under the New York Stock Exchange and other are listed under the Nasdaq Exchange.
Therefore, the options of those companies will be listed under their corresponding stock exchange.
Yahoo Finance Website and Yahoo Finance App
It turns out Yahoo Finance does better than the other two by providing Implied volatile in their last column.
This is available on both the website and the mobile App version we recently depicted here.
We shared some of our practical insights about SPY option chain and others majors ones such as AMD option chain and AAPL option chain.
Recommendations were made on what to look for when analyzing options chains and the best places on the internet to get that information.
We hope you found value in this tutorial.
Please leave us your thoughts and comments below so that we can continue to bring you the knowledge you need on your way to becoming a successful stock and options trader.
Suggested Resources and Reading