What it means
When you look up options on a share, you do not see a single price but a grid. Each row is a strike price, which is the price at which the option holder may buy or sell the underlying shares.
Each block is an expiry date, and the calls and puts for that date appear side by side. For each contract the chain normally shows the bid, the ask, the last traded price, volume and open interest.
The bid is the highest price a buyer will pay and the ask is the lowest price a seller will accept, and the gap between them is the spread. Volume counts the contracts traded today, while open interest counts the contracts still outstanding.
Reading the chain helps a person compare alternatives. Options with strikes near the current share price, called at-the-money, usually have the most trading and the tightest spreads.
Options far from the share price are cheaper but less likely to pay off. Many chains also display implied volatility, which is the level of price movement the market is pricing in, along with measures of sensitivity such as delta.
These figures allow traders to compare contracts quickly without running their own calculations. A chain with wide spreads and low volume warns that the option is hard to trade at a fair price.
Most chains let the viewer filter by expiry date, by strike range and by calls or puts only. Some platforms colour the in-the-money contracts to make them easy to spot, and others add a column showing the probability the market implies of finishing in the money.
Companies meet option chains too, for example when a treasury team considers buying options to hedge currency or commodity risk. Exchange-listed contracts appear in the chain, and a treasurer can compare costs before approaching a bank for a tailored alternative.
The chain does not replace judgement, but it provides transparent market prices.
In practice
Real-world examples.
Example
An investor who owns shares wants to sell calls to earn extra income. She opens the option chain, finds a strike about 10% above the current price and chooses the expiry that offers the best premium for the risk she is willing to take. She checks that the bid-ask spread is narrow before she places the order.
Example
A company treasurer wants protection against a fall in the price of a commodity it sells. The treasurer reviews the chain for put options, compares the cost at different strikes and picks the one that fits the budget.
Example
A trader notices that one expiry in the chain has far higher volume than the others. She concludes that this is where the market is focusing and checks whether upcoming news explains it.
Formula
Calculation
Mid price = (bid + ask) / 2
Cost of one contract = ask price x contract size (usually 100 shares)
A share trades at $50. In the chain, the call with a strike of $45 has a bid of $5.40 and an ask of $5.60. Mid price = (5.40 + 5.60) / 2 = $5.50. The call is $5 in the money, since 50 - 45 = $5, so its time value = 5.50 - 5.00 = $0.50. Buying one contract at the ask costs 5.60 x 100 = $560.Case study
Seen in the real world.
Pinecrest Retail Group is a fictional company with a large holding of shares in a supplier. The chief financial officer wanted to protect the value of that holding before a planned sale in six months.
She opened the option chain and compared put options at three strikes, each expiring after the planned sale date. The $90 strike cost $1.50 per share, the $95 strike cost $2.70 and the $100 strike cost $4.40, and a higher strike gave more protection at a higher premium.
In this illustrative story the group chose the $95 puts and weighed the cost of 2,000 shares x 2.70 = $5,400 against the downside it avoided. The chain gave the team a clear, public set of prices from which to make the decision. The board paper included a screenshot of the quotes and the date and time they were taken.
Watch out
Common mistakes.
- Using the last traded price as the cost of the option, when the current bid and ask may be quite different.
- Ignoring volume and open interest, which show whether the contract can actually be traded at a fair price.
- Forgetting the contract size, so the real cost is 100 times the quoted price per share.
Questions
People also ask.
What do the calls and puts columns mean?
Calls give the right to buy the underlying shares at the strike price, while puts give the right to sell them at that price.
What does in the money mean?
A call is in the money when the share price is above the strike, and a put is in the money when the share price is below it.
Why are some options in a chain unavailable or unpriced?
Because they are not actively traded, or because there is no bid, which usually means they are hard to buy or sell.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related