Lessons from the Pros


Tuning Up the Option Chain

The Option Chain is the term for the list of available options for a stock or other underlying asset.  As option traders, we use the option chain constantly to look up the information we need.

Free Trading WorkshopThis information comes from the option exchanges and is relayed to us through third parties who format it into a usable form. Although option chains are available as a stand-alone product online from various sources, we normally get it from the provider of our trading software as part of their offering.

There is a fairly standard layout for an option chain, but this may not be exactly what we want. Many vendors allow us to customize the option chain by adding or removing some items of information. Below is an example of how we might want to customize our option chain.

First, here is a pretty standard option chain layout, shown for options on SPY. This example happens to be from the TradeStation trading platform:

What is the option chain and how to use it

The chain shows a row for each strike price. The Strike column is the middle column on the chain. Call option information is to the left of the Strike, and put information is to the right.

The information given for each strike includes the Bid and Ask prices, the Greeks (Delta, Gamma, Theta, Vega and Rho), Volume and Open Interest.

Most of this information is useful, but we can probably do without a couple of items. Depending on how advanced your option trading is, you may not really need all of the Greeks.

Rho is the impact of interest rate changes. This is occasionally useful, such as when a Fed meeting is coming up where interest rates might in fact change. Otherwise, we can leave it off.

Gamma is the rate of change of Delta as the stock price moves. Some advanced kinds of trades require us to take gamma into account. If that is not the kind of trades we do, then we can do without that one.

Kicking out a couple of Greeks gives us room for some other information on the chain. What else is available depends on our software provider (or broker, who may also provide the software). TradeStation provides a pretty comprehensive set of options, as we can see here:

How to customize the option chain for your trading style

All of the items on the left are additional things that can be added to the chain. There is not room for all of them, but some may be worth adding:

Mid is the midpoint between the Bid and Ask prices for the option. This is useful because the midpoint price represents the fair value of the option. This is a good price to use as a limit price when trying to buy or sell an option. Other option platforms may refer to this as the mark.

Prob ITM is an interesting item. This gives the probability of the option finishing in the money (having any value) at expiration. It is calculated based on the underlying asset’s volatility.  This is a good thing to know when buying or selling an option. For example, if we are selling a put option on a stock that we do not own, what is the probability that we will be forced to buy the stock? The Prob ITM gives the answer.

As you can see, many other items are available. Each vendor’s offerings are somewhat different. We can choose the items that we find most useful.

If we add Mid and Prob ITM to our chain in place of Rho and Gamma, then we get a chain that looks like this:

Adding Prob ITM to your option chain shows the probability of having to buy the stock

Now we can see that if we wanted to sell a Put at the 199 strike, the Mid price, at which we would offer the put, is $2.79. And the Prob ITM reading of .2204 means that there is a 22% chance that SPY will be below 199 at expiration, in which case we would have to buy it at $199. A 22% chance that something will happen, of course, means that there is a 100 – 22 = 78% chance that it will not happen. That is a good thing to know – the odds of this trade working out so that we do not have to buy the stock are pretty high.

You may find that other items of information are more useful to you, depending on your trading style. Whatever your style, check out what is available in your trading platform. You may well find that you can customize it to make your trading easier and better.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.