Lesson

Reading the Options Chain | Options Educator

Master the options chain, understand bid/ask spreads, volume, and open interest signals.

What you'll practice

  • Buying at the ask and selling straight back at the bid loses the spread. Find the contract, call or put, with the widest bid-ask spread on this chain.
  • Find the contract, call or put, with the most open interest: the most contracts still open.
  • Spot the unusual volume: find the contract whose volume today is largest compared with its open interest.

In this lesson

Understanding the Options Chain

  • Bid = what buyers pay, Ask = what sellers want
  • Volume shows today's activity level
  • Open Interest shows total existing contracts
  • Calls on left, Puts on right, Strikes in middle

Strike Price: The Heart of Options

  • Strike price determines your buying/selling price
  • ITM options have intrinsic value
  • ATM options are at the current stock price
  • OTM options have no intrinsic value - only time value

ITM, ATM, OTM: Complete Breakdown

  • ITM = has intrinsic value, more expensive, lower risk
  • ATM = all time value, highest theta, delta ≈ 0.50
  • OTM = no intrinsic value, cheaper, higher risk of total loss
  • The same strike can be ITM for calls and OTM for puts (and vice versa)

How to Choose Your Strike: The Decision Framework

  • Match strike to your conviction level and risk tolerance
  • Higher conviction = can use OTM for leverage
  • Lower conviction = stick to ATM or ITM for safety
  • Consider time horizon and IV when selecting strikes

Delta as a Probability Guide

  • Delta ≈ Probability of expiring ITM
  • Higher delta = higher probability but more expensive
  • Lower delta = cheaper but needs bigger move
  • Breakeven gets worse as you go further OTM

Strike Selection for Different Strategies

  • Match strike selection to your strategy type
  • Directional trades: conviction determines strike distance
  • Spreads: use strike width to define risk/reward
  • Income strategies: sell OTM to balance premium vs assignment risk

Reading Option Volume and Open Interest

  • High volume + high OI = most liquid strikes
  • Unusual volume can signal institutional moves
  • Stocks often pin to high OI strikes at expiration
  • Compare volume to OI to understand if positions are opening or closing

Practical Strike Selection Examples

  • Earnings plays: avoid deep OTM due to IV crush
  • Long-term positions: consider deep ITM for stock-like behavior
  • Income strategies: sell OTM to balance premium vs assignment
  • Protection: spreads can be more efficient than single legs

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