What is an Option Chain?

Definition:

An option chain is a handy, interactive tool for investors looking to buy and sell options for a specific security, like a stock. Also called an option matrix, its purpose is to curate relevant information — from pricing details to premiums and expiration dates — and make trading options as seamless an experience as possible.

🤔 Understanding an option

An option chain is a visual display of a range of information that comes in handy when an investor is looking to trade options. An option is a contract that gives the owner the right to buy (in the case of a call option) or sell (in the case of a put option) a security at a certain price, up until a specified expiration date. The world of options trading is full of industry-specific language: strike price, change, bid-quote, ask-quote, open interest, symbol, etc. An option chain seeks to ensure that — despite the jargon and an overwhelming collection of numbers fluctuating in real-time — the process of trading options remains smooth and accessible to suitable investors. The display connects all the information in the form of a chain, but you might hear the same thing referred to as an option matrix.

Example

There are several different option chains available for investors interested in trading options. Electronic stock trading platforms like TD Ameritrade, and brokerage firms like Charles Schwab and Fidelity Investments, all have their own. Option chains can also be found on financial websites like Yahoo Finance and WSJ.com. Here’s how you can trade options on your smartphone through Robinhood, free of any commission (other fees may still apply to your brokerage account, check our Robinhood Financial Fee Schedule to learn more). Variety is the spice of life! Pick your favorite, based on your experience as a user interacting with the information display. All investments carry risk.

Takeaway

An option chain is like a carefully arranged cheeseboard...

You can scan through a variety of known and unknown cheeses, ultimately picking a combination that pairs best with the wine you’re drinking — the options trade that works best for you. As you gain experience combing through your options (pun intended), your pairing strategy evolves, and it may help you develop a personalized options trading strategy.

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Tell me more…

Can options be traded through option chains, or are option chains just an information portal?

In some cases, yes. Depending on the platform, you may be able to make the trade on the option chain.

How can I get started?

A good place to start is familiarizing yourself with the meanings of certain labels on columns you will see in an option chain:

  • Symbol: Every option has a symbol, just like its underlying stock. The symbol may vary, depending upon the option’s expiration date. Remember, an option is a contract that temporarily ties the buyer and seller of a specific security, like a stock, together in a possible (but not mandatory) deal and is valid through a specified expiration date.
  • Volume: Volume tells you how many contracts of a particular option were traded during the most recent trading session.
  • Last price: The last price is the most recently posted trade on an option.
  • Strike: Strike, or strike price, or exercise price, is the price the seller promises to buy (in the case of a put option) or sell (in the case of a call option) at anytime through an option’s expiration date.
  • Put and call: A ‘put’ option is an option that gives its owner the right to sell at a certain strike price until a certain expiration date. A ‘call’ option gives its owner the right to buy stocks, bonds, or other assets until a certain expiration date. For example, a single call options contract might allow the owner to buy 100 shares of a stock at $100 until its expiration date in three months.
  • Closing price: The closing price is the final price at which any stock trades during regular hours on any day. It is considered the most accurate valuation of a stock or any other security, like an option, until trading resumes the following day.
  • Change: A change column will show you how much the last price, or the most recent price at which an option was last traded, varied from the previous day’s closing price.
  • Bid and ask: These columns show the real-time prices at which buyers and sellers are willing to trade. A customer placing a market order to buy an options contract will pay the ask price. A customer placing a market order to sell an options contract will receive the bid price.
  • Open interest: An open interest number indicates the total number of contracts of a certain option that are pending. As trades succeed and deals are closed, open interest decreases.
  • Trade: Either a buyer will take the offered price (ask) or the seller will accept the buyer’s bid. That’s when the trade is successful and a transaction will occur. Note that not all options trade very often, perhaps because the bid and ask prices didn’t come close enough for a trade.

You may not see this on your option chain, but having knowledge about the concepts of call and put options being ‘in, at, or out of the money’ is crucial when you’re analyzing information on an option chain and making a decision about a trade and the resulting deal. Learn more about what is meant by options being ‘in the money,’ ‘at the money,’ or ‘out of the money’ here.

What does “settle” mean in options trading?

When the terms of an options contract are under discussion between a buyer and a seller, we say those options are in the process of being ‘settled.’ Clearing houses, organizations that act as intermediaries between buyers and sellers, help this process along, culminating with the buying and selling of a security.

Can cash be used to settle a trade?

There are two types of settlement options for options: physical and cash.

Physical settlement is when the seller of the contract delivers the actual underlying asset, like stock, by a specific delivery date. This is the more common of the two methods used to settle an options trading deal.

A cash-settled option works the other way. Physical delivery of the underlying asset is not required. A payment is made in cash instead of settling through stocks, or any other assets. This is more common for index options.

This all feels too complicated. Can I just use a broker to trade options for me?

Yes, you may use a traditional broker. But here’s the thing. Fighting your way through the complexity could make you a more experienced investor and help you make better investing decisions.

Are there risks associated with trading options?

Yes, you betcha! Options trading entails significant risk (aka you can lose all your money very fast) and is not for everyone. Certain complex options strategies carry even additional risk. You can learn more about these risks by reviewing the handy dandy options disclosure document titled Characteristics and Risks of Standardized Options, available here or through https://www.theocc.com. It’s important to consider your investment objectives and risks carefully before trading options. Supporting documentation for any claims, if applicable, will be furnished upon request.

Can you show me how to trade options on the Robinhood app?

Sure! In 2017, Robinhood Financial introduced commission-free options trading. To place an options trade, tap the magnifying glass on the top right corner of your home page. Then, search the stock you’d like to trade options for. From there:

  1. Tap the name of your preferred stock
  2. Tap Trade at the bottom right corner of the stock’s Detail page
  3. Tap Trade Options
Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

20200409-1146596-3447282

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

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