How to read an option chain

An option chain lists, for one underlying stock, every contract available: calls on one side, puts on the other, strike prices down the middle, one table per expiry date. A call is the right to buy at the strike; a put is the right to sell at the strike. Both expire.

Read down the strikes and you are asking "at what price". Read across expiries and you are asking "by when". Everything else on the row is the market's answer to how likely that combination is, and what it costs.

An option's price has two parts. Intrinsic value is what it would be worth if it expired right now — a call struck at 100 with the stock at 112 has twelve dollars of intrinsic value; struck at 120 it has none. Everything above intrinsic value is time value, and time value is the market pricing the chance that things move before expiry.

Time value decays, and it decays faster as expiry approaches. That decay is theta, and it is the reason buying options is harder than it looks: you can be right about direction and still lose, because you were right too slowly.

Implied volatility is not a forecast the chain is giving you — it is the volatility number that makes the pricing model output the price the option is actually trading at. It is the market's opinion, backed out of the price.

High implied volatility means options are expensive. Low means cheap. This is separate from direction: you can be exactly right that a stock will rise and still lose money on a call, because you bought volatility at forty and it fell to twenty-five while the stock moved.

The most reliable example is earnings. Implied volatility climbs in the days before a report, because the outcome is uncertain and everyone wants protection. Then the report lands, the uncertainty resolves, and implied volatility collapses — regardless of which way the stock went. In Margin Call this is modelled explicitly: about a fifteen per cent ramp over the seven days before, and roughly a thirty per cent crush afterwards.

The Greeks say how the option's price responds to each thing that can change.

• — Delta — how much the option moves per one-point move in the stock. Also a rough read on the probability of finishing in the money.
• — Gamma — how fast delta changes. High gamma means the position's character changes quickly as the stock moves.
• — Theta — how much value the option loses per day from time passing alone.
• — Vega — how much the option's price moves per one point of implied volatility.

The first is buying options into earnings because you have a view on the result. Even when the view is right, the volatility crush often takes more than the move gives. If you want exposure to the event, the chain is telling you what that costs, and it is usually more than it looks.

The second is treating a cheap far-out-of-the-money option as a cheap bet. It is cheap because it is unlikely. Buying it repeatedly is a strategy with a small chance of a large win and a large chance of losing everything, which is a fine thing to do knowingly and a poor thing to do by accident.

Margin Call prices its chains with Black-Scholes and full Greeks over a volatility surface that includes out-of-the-money put skew, so both of these behave the way they do in a real chain. Being wrong about them costs nothing here.

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