If you’re stepping into options trading, one of the first things you’ll encounter is an options chain. At first glance, it might look like an overwhelming block of numbers, but once you break it down, it becomes a powerful tool for making informed trading decisions.

Let’s go through what an options chain is, how to read it, and what to focus on when analysing charts for options trading.

‍

Understanding The Options Chain

An options chain is a table displaying all available option contracts for a specific stock or asset. It lists key details like strike prices, expiration dates, premiums, and other metrics that traders use to assess potential trades.

Each row in an options chain represents an option contract, and the table is typically split into two sections: calls on one side and puts on the other. Calls give the buyer the right (but not the obligation) to purchase the underlying asset, while puts give the right to sell.

‍

Key Elements Of An Options Chain

An options chain contains several key metrics that traders use to assess contracts. Each component offers insight into pricing, liquidity, and potential profitability. 

Understanding these elements allows traders to make well-informed decisions when buying or selling options.

Strike Price

The strike price is the set value at which an option can be exercised. For a call option, it represents the price at which the underlying asset can be purchased, while for a put option, it is the price at which it can be sold. The difference between the strike price and the asset’s market value determines if the option holds intrinsic value.

Expiration Date

Every option contract comes with an expiration date, marking the final day it can be exercised. 

Options with shorter expirations tend to lose value quickly due to time decay, whereas longer-term options retain more of their premium. Traders must factor in the time left to expiry, as it directly affects pricing and the probability of profit.

Premium (Bid & Ask Prices)

The premium is the cost of buying an option or the amount received when selling one. It is made up of two main components: the bid price, which represents what buyers are willing to pay, and the ask price, which reflects what sellers are offering. The difference between these two is known as the bid-ask spread.

A tight bid-ask spread suggests strong market interest and liquidity, whereas a wider spread may indicate lower trading activity and potential price inefficiencies.

Open Interest

Open interest reflects the total number of outstanding contracts that have not yet been closed, exercised, or expired. 

High open interest indicates strong market participation and liquidity, making it easier to enter or exit a position. Low open interest, on the other hand, may suggest limited demand and potentially higher difficulty in executing trades at favourable prices.

Volume

Volume represents the number of contracts traded within a specific timeframe, usually on a daily basis. A higher volume suggests active trading and confirms that the market is responding to price movements.

When volume spikes significantly, it often signals increased interest in that particular strike price or expiration date, possibly due to market news or changes in sentiment.

Implied Volatility (IV)

Implied volatility estimates the expected price fluctuations of the underlying asset before the option expires. Higher IV generally leads to more expensive premiums, as greater uncertainty increases potential profit opportunities. 

Conversely, lower IV suggests stability, making options cheaper but potentially offering fewer chances for large price swings.

Intrinsic & Extrinsic Value

An option’s premium consists of two parts: intrinsic value and extrinsic value. Intrinsic value is the amount an option is already "in the money," meaning it has real worth based on the stock’s price. 

Extrinsic value, also known as time value, reflects factors like time until expiry and market volatility. The closer an option is to expiry, the more its extrinsic value diminishes due to time decay.

‍

How To Read An Options Chain

Now that the key components of an options chain are clear, the next step is understanding how to interpret them when trading. Each section of the chain provides insights into market expectations, pricing, and risk. Knowing how to analyse these details allows traders to make informed decisions based.

1. Calls vs. Puts

An options chain is divided into two sections: call options on one side and put options on the other. 

Call options give the buyer the right to purchase the asset at the strike price, making them attractive when expecting a price increase. Put options, on the other hand, allow the buyer to sell at the strike price, which benefits traders anticipating a decline. 

Since each contract represents 100 shares, a displayed premium of $2.00 translates to an actual cost of $200 per contract.

2. Strike Price & Moneyness

Strike prices are listed at the centre of the options chain, representing various price levels where contracts may be exercised. The relationship between an option's strike price and the stock’s current market value determines its "moneyness." In-the-Money (ITM) options hold intrinsic value—for example, a call option with a strike lower than the stock’s current trading price.

At-the-Money (ATM) options have a strike price close to the stock’s current value, while Out-of-the-Money (OTM) options hold no intrinsic value, like a call option with a strike above the stock price. ITM options generally have higher premiums since they already contain value, whereas OTM options are cheaper but carry more risk.

3. Premium: Bid & Ask Prices

Each option has two key prices: the bid, representing what buyers are willing to pay, and the ask, which is the price sellers are offering. 

The difference between these two figures is known as the spread. A narrow spread usually indicates strong liquidity and market interest, making it easier to trade the contract at a fair price. 

A wider spread suggests lower trading activity, which can lead to higher transaction costs when entering or exiting a position.

4. Open Interest & Volume

Open interest refers to the number of existing contracts that are still active and have not yet been exercised, closed, or expired. 

A higher open interest suggests strong participation, meaning traders are actively holding positions in that option. Volume, on the other hand, measures how many contracts have been bought or sold on a given trading day. 

High volume often confirms strong market interest, making it easier to execute trades without significantly impacting the price.

5. Implied Volatility (IV)

Implied volatility estimates how much price movement the market expects before the option expires. Higher IV indicates that traders anticipate larger fluctuations, often leading to more expensive option premiums due to increased uncertainty. 

Lower IV suggests more stable price action, resulting in cheaper options but fewer opportunities for substantial gains. Since IV directly affects option pricing, traders often assess it to gauge potential profitability before entering a trade.

‍

How to Read Charts for Options Trading

Understanding an options chain is only part of the equation—being able to analyse price charts provides valuable insights for making informed trading decisions.

Identifying Trends

Observing price trends is key to selecting the most suitable option strategy. A stock that has been rising steadily indicates an uptrend, making call options a more attractive choice. Conversely, a stock experiencing a consistent decline suggests a downtrend, where put options may be the better option. 

Examining historical trends alongside recent price action helps traders gauge the likelihood of continued movement in a particular direction.

Support & Resistance Levels

Support is a level where buying interest tends to be strong enough to prevent further decline, making it a favourable entry point for call options. 

Resistance, on the other hand, is where selling pressure builds up, causing the price to struggle to move higher—this is often a good area to consider put options. Identifying these levels helps traders time their entries more effectively and avoid chasing price movements.

Volume & Open Interest Analysis

Higher trading volume indicates strong interest in the stock or option, which can make it easier to enter and exit trades without large price fluctuations. Open interest, which measures the total number of outstanding contracts, reflects ongoing market activity. 

A growing open interest suggests increasing trader confidence, while a decline may signal fading interest in the contract.

Monitoring Implied Volatility

Implied volatility (IV) affects option pricing, making it an important factor to watch. When IV is high, option premiums tend to be expensive because the market expects large price swings. This can make buying options riskier unless a big move is anticipated. 

On the other hand, selling options during periods of elevated IV can be more profitable, as the premium collected will be higher. Understanding IV trends helps traders decide when to enter positions and manage risk effectively.

‍

Conclusion On What Is An Options Chain

An options chain is an essential tool for traders looking to navigate the trading world effectively. 

Understanding key elements like strike prices, expiration dates, premiums, and implied volatility can help in making well-informed decisions. Whether you are looking to generate income, or take advantage of market trends, mastering how to read an options chain is a valuable skill.

But knowledge alone isn’t enough—you need the right strategies to trade with confidence. That’s where Next Level Academy’s comes in. 

Our expert-led FREE Next Level Options Masterclass  will teach you how to identify profitable opportunities, manage risk effectively, and build a trading plan that works. 

Don’t miss the chance to level up your skills! Sign up today and start trading smarter!

‍

Frequently Asked Questions About What Is An Options Chain

What Is The Difference Between An Options Chain And An Options Table?

An options chain displays a complete list of available contracts for a specific stock, while an options table may focus on selected strikes, expirations, or specific strategies. The chain provides a more detailed overview, whereas a table is often simplified for quick decision-making.

Is An Options Chain The Same For All Trading Platforms?

While the basic structure remains the same, different platforms may present options chains with slight variations in formatting, additional metrics, or interactive tools. Some brokers also offer customisable views to focus on specific data points relevant to traders' strategies.

Should Beginners Trade In-The-Money Or Out-Of-The-Money Options?

Beginners often find in-the-money (ITM) options less risky since they have intrinsic value and a higher probability of expiring profitably. Out-of-the-money (OTM) options are cheaper but require a more substantial price movement to become profitable, making them riskier for inexperienced traders.

How Do You Use An Options Chain To Select The Best Contract?

Traders look at strike price, expiration date, volume, open interest, and implied volatility to identify the most suitable contract. A liquid option with a reasonable premium and an appropriate risk-reward balance is often preferred.

What Happens To Open Interest After An Option Expires?

When an option expires, its open interest drops to zero as all contracts are either exercised or become worthless. New contracts with future expiration dates take their place in the options chain.

Is There A Way To Predict Which Options Will Have High Liquidity?

Options with higher open interest and trading volume tend to have better liquidity, making them easier to buy or sell. Popular stocks, near-the-money strikes, and shorter expiration periods generally attract more trading activity.