Options Chains Explained

Option prices are typically presented by brokerage firms in option chains, sometimes called an option montage (mostly in books). Notice how the following November 2006 option chain for RadioShack Corp. (RSH) presents both call and put option data side-by-side for the same expiration month: November 2006. The stock price at the time the chain was generated was $20.04. The NTM $20-strike call and put data are highlighted. This chain tells us a few things about RadioShack options at the time.

Figure 3.12

RadioShack Corp. (RSH) Price: 20.04 Option Chains – NOV 2006
Sym Last Chg Bid Ask Vol O.I. STR Sym Last Chg Bid Ask Vol O.I.
RSHKV 0 0 7.40 7.70 0 0 12.5 RSHWV 0 0 0 0.05 0 0
RSHKC 4.80 0 5.10 5.90 0 7 15.0 RSHWC 0 0 0 0.10 0 0
RSHKW 2.85 -0.10 2.80 2.95 10 459 17.5 RSHWW 0.25 -0.05 0.20 0.30 5 285
RSHKD 1.15 -0.15 1.10 1.15 33 871 20.0 RSHWD 0.90 0 0.95 1.05 0 545
RSHKX 0.40 -0.10 0.20 0.30 2 188 22.5 RSHWX 3.00 0 2.55 2.70 0 367
RSHKE 0.05 0 0 0.10 0 55 25.0 RSHWE 0 0 4.90 5.00 0 0


Quite a bit of data is provided. We see the option symbols for the respective call and put strikes, as well as the current open interest and volume (number of contracts traded) for the day – if any. We also are presented the last sale price and the change from the closing sale price previous to that (meaning the closing price from the previous trading day, not the immediately previous sale), as well as the current bid and asked prices. The “inside” bid-asked quote shown in option chains typically will reflect composite quotes, meaning that bid and asked prices can come from different option exchanges. Thus an inside quote of 1.10 x 1.15 might not reflect the bid and asked quotes on the options exchange where your order is sent.

Options in RadioShack at the time were not particularly liquid, and some strikes had no volume and no open interest. The highest open interest (unless the stock recently has moved) usually will be in the ATM strike, growing progressively smaller the more ITM or OTM the strike. When the stock is between two strikes, they may both have high open interest.

As expected, the highest open interest was 871 for the ATM call and 545 for the ATM put. We would expect comparatively little open interest and volume in strikes that are deeply ITM or OTM, and the 12.50, 15 and 25 strikes indeed have very little. Had the stock price recently fallen or risen, either the higher or lower strikes would show higher open interest and volume, because they recently would have been closer to the money. The low open interest in both the ITM and OTM strikes therefore indicate that RSH had not moved much recently before this option chain was derived, which is the case.

The NOV 20 Call option (RSHKD) has had volume on the print date of only 33 contracts and there is an open interest of 871, which is not particularly liquid. The chains tell us that the 20 Call is bid at $1.10, with an asked price (offer) of $1.15, a spread of only $0.05. The last transaction price was $1.15, at the offer. You would expect to receive $1.10 if writing the 20 Call, or pay $1.15 if buying it.

The NOV 20 Put option (RSHWD) has had no volume on the print date, and the open interest is only 545. The bid price is $0.95 and the offer is $1.05, a spread of $0.10. The last trade was $0.90, which would have occurred on the previous date in all likelihood, since there has been no volume on the print date. You would expect to receive $0.95 if writing the NOV 20 Put, or pay $1.05 if buying it.

A perusal of the option chain shows us some immediate trade possibilities. If we decided to write a covered call using the NOV 20 Call, we would expect to pay $20.04 for the stock and to receive $1.10 for writing the call, costing us a net debit of $18.94 to put on the trade. Suppose we believe that RSH will hold its price or fall and decide to create a bear call spread? We can instantly see that it is possible to sell the NOV 20 Call for $1.10 and buy the NOV 25 Call for only $0.10, which creates a net credit of $1.00. (Another bearish option strategy, the bear put spread, takes advantage of falling markets too).

Your order must be entered in light of current quotations, in order to avoid wasting your time and to have a reasonable shot at getting your order filled, unless you are willing to gamble on the market moving to a level that transforms your order a market order. As we will see further on, it is advantageous when writing covered calls to fatten or lean the trade order to either pay less on entry or get a bigger credit when closing. But when the bid-asked spread is only $0.05 or $0.10, there isn’t much fat to cut!