HOW TO READ AN OPTIONS CHAIN AND PICK THE RIGHT STRIKES

What Is an Options Chain?

An options chain is a comprehensive list of all the available call and put options for a particular underlying asset, such as a stock or ETF, for a specified expiration date. It presents all essential data traders need to evaluate before entering an options trade — including strike prices, expiration dates, premiums, and implied volatility.

The chain is typically divided into two sections: calls on the left and puts on the right. Each row corresponds to a specific strike price. Major online brokers and trading platforms provide interactive options chains showing real-time quotes and data.

Key Elements of an Options Chain

Understanding an options chain begins with recognising the core components:

• Strike Price: The predetermined price at which the underlying asset can be bought (calls) or sold (puts) if the option is exercised.
• Expiration Date: The last day the option can be exercised. After this date, the option becomes void if it has not been exercised.
• Premium: The market price or cost of the options contract, quoted on a per-share basis (usually multiplied by 100, since one options contract typically covers 100 shares).
• Bid/Ask Spread: The difference between the price buyers are willing to pay (bid) and the price sellers want (ask).
• Open Interest: The total number of open contracts that have not yet been closed or settled.
• Volume: The number of contracts traded during the current trading day.
• Implied Volatility (IV): A gauge of the market's expectation of future volatility; higher IV typically leads to higher premiums.

Each of these elements provides crucial insight into liquidity, pricing, and the popularity of a particular options contract.

Call vs. Put Options

Every strike price typically lists both a call option and a put option:

• Call Option: Grants the right but not the obligation to buy 100 shares of the underlying asset at a specified strike price before expiry.
• Put Option: Grants the right but not the obligation to sell 100 shares of the underlying asset at a specified strike price before expiry.

The selection between calls and puts depends on your market view — bullish for calls, bearish for puts.

In-the-Money, At-the-Money, Out-of-the-Money

Understanding moneyness is essential to reading an options chain effectively:

• In-the-Money (ITM): Call option with strike price below current stock price; put option with strike price above the current stock price.
• At-the-Money (ATM): Strike price is approximately equal to the current stock price.
• Out-of-the-Money (OTM): Call option with strike price above current stock price; put option with strike price below current stock price.

In-the-money options generally have higher premiums due to intrinsic value, while out-of-the-money options are cheaper but riskier.

Selecting the Appropriate Strike Price

Choosing the correct strike price is crucial for executing a successful options trade. The “strike” determines your potential upside, downside, and likelihood of the option finishing in the money. Traders must consider their market outlook, risk tolerance, and trade strategy when picking strikes.

Factors That Influence Strike Selection

Here are key considerations when choosing a strike price:

• Market Outlook: Are you bullish, bearish, or neutral? This determines whether you’ll want a call, put, or even a combination like a straddle or iron condor.
• Risk Appetite: In-the-money options are safer and more expensive, while out-of-the-money offers higher reward potential but lower probability of success.
• Volatility Expectations: High implied volatility inflates option premiums — selling options in such an environment can be beneficial, while buying should be more selective.
• Time Horizon: The shorter the timeframe, the more sensitive the option will be to price changes in the underlying asset (higher gamma).

Common Strike Selection Strategies

Depending on your strategy, different strike prices may be appropriate:

• Buying Calls: Choose ATM if expecting a modest gain, OTM for higher rewards but increased risk, or ITM for safer albeit pricier options.
• Buying Puts: Same logic applies; ATM for balance, OTM for speculation, ITM for safety and intrinsic value.
• Selling Options: Often involves picking strikes where you expect the option will expire worthless (e.g., covered calls or cash-secured puts).
• Spreads: Choose two strike prices to construct a defined-risk strategy, such as bull call spreads or bear put spreads. Risk-reward is optimised based on the distance between strikes and premium differentials.

For example, if a stock is trading at £100 and you anticipate modest upside, an ATM call at £100 or slightly OTM at £105 might be ideal. If you sell a covered call, you might choose £110 to collect premium income while allowing for upside movement before assignment.

Strike Price Liquidity

Always assess open interest and volume. Higher numbers imply better liquidity and smaller bid/ask spreads, which improves trade execution and reduces slippage. Illiquid strikes should generally be avoided unless they align strongly with your analysis or payoff preferences.

Also consider round-number pricing — strikes like £50, £100, or £150 often carry higher volume and contract interest, due to psychological and institutional trading patterns.

Understanding Expiration Selection

Choosing the right expiration date is just as important as selecting the strike price. The expiry affects how long your trade has to work out, the cost of the option (time value), and your exposure to decay (Theta). Options can have expiries as short as one day (weekly options) or as long as multiple years (LEAPS – Long-Term Equity Anticipation Securities).

Short-Term vs. Long-Term Expiries

There are pros and cons to different expiration types:

• Short-Term (Weekly or Monthly): Lower premium, higher time decay, greater Gamma. Ideal for earnings plays or quick moves.
• Medium-Term (2–3 months): Balanced between cost and time to play out. Suitable for directional trades with time to develop.
• Long-Term (LEAPS): Higher premium, lower time decay, useful for long-term investing strategies or hedging.

For instance, a trader seeking to profit from a short-term spike in volatility might choose next week’s expiry, whereas a long-term investor looking to secure leverage for a bullish position may prefer a one-year LEAP option.

Impact of Theta and Time Value

Theta refers to time decay — the erosion of an option’s value as it approaches expiration. Options lose value more rapidly as expiry nears, especially for OTM contracts. Therefore, traders buying options may prefer more time to reduce Theta's impact, while sellers often benefit from faster decay close to expiration.

Time Value is the portion of the premium that exceeds the intrinsic value. The longer the time to expiry, the higher the premium due to greater uncertainty.

Expiry Timing Based on Strategy Types

Your trade strategy should define your expiration choice:

• Buy-and-Hold Options: Use long-dated LEAPS to ride long-term trends, ideally ITM for intrinsic value and lower decay sensitivity.
• Event-Based Trades: Select expiries shortly after known catalysts (earnings, Fed announcements) to avoid excessive time premium while still capturing the move.
• Credit Spreads and Covered Calls: Shorter expiries help capitalise on Theta decay, especially when time value is elevated and implied volatility is high.

Additionally, traders must be mindful of settlement issues near expiration — especially around triple witching dates or holidays where liquidity could dry up. It's also wise to exit or roll trades ahead of expiration deadlines to avoid assignment risks or exercise errors.

Volume and Open Interest by Expiry

Similar to strike selection, always review open interest and trading volume for different expiration dates. Some expiries may be thinly traded, leading to wider spreads and less price efficiency. Popular expirations — like standard monthly dates — generally offer better execution.

Finally, monitor the interaction between implied volatility and expiration length. Longer-dated expiries typically smooth out short-term volatility spikes, while near-term contracts can dramatically inflate in volatile periods, influencing pricing and profitability.