How to read an option chain

An option chain lists every contract you can buy on one share. Calls sit on one side, puts on the other. The strike prices run down the middle. There's one table for each expiry date.

A call is the right to buy at the strike price. A put is the right to sell at the strike price. Both run out on the expiry date.

Read down the strikes and you're asking "at what price?". Read across the dates and you're asking "by when?". Every other number on the row is the market answering how likely that looks, and what it'll cost you.

An option price is two things stuck together.

The first is what the contract would be worth if it ran out right now. A call to buy at 100, when the share is at 112, is worth twelve dollars today. The same call at 120 is worth nothing today. That part's called intrinsic value.

Everything above that is time value. That's the market charging you for the chance things move before the deadline.

Time value drains away, and it drains faster as the deadline gets close. Traders call that drain theta. It's why buying options is harder than it looks. You can be completely right about direction and still lose, because you were right too slowly.

It sounds like a forecast. It works backwards. Take the price the option really trades at, feed it back through the pricing maths, and ask what amount of movement would produce that price. The answer is implied volatility. It's the market's opinion, pulled back out of the price.

High implied volatility means options are pricey right now. Low means cheap. None of that has anything to do with direction. You can be exactly right that a share will rise, and still lose money on a call. You bought when movement was priced at forty. It dropped to twenty-five while the share crept up.

Earnings day shows this best. Before a company reports, nobody knows the numbers, everyone wants protection, and implied volatility climbs. Then the report lands, the mystery's gone, and implied volatility collapses. It collapses whichever way the share went.

Margin Call does this on purpose. Expect a climb of about fifteen per cent over the seven days before results. Then a collapse of about thirty per cent.

The Greeks tell you how the option price reacts to each thing that can change. Scary names, simple jobs.

• · Delta: how far the option moves when the share moves one point. It doubles as a rough chance of the contract being worth something at the end.
• · Gamma: how fast delta itself changes. High gamma means the bet can change character quickly.
• · Theta: how much value the option loses each day, purely from time passing.
• · Vega: how far the option price moves for each point of implied volatility.

The first is buying options just before results because you're sure about the numbers. Even when you're right, the collapse in implied volatility often takes back more than the share move gives you. The chain is already telling you what that bet costs, and it's steeper than it looks.

The second is seeing a very cheap option miles from today's price and treating it as a cheap punt. It's cheap because it probably won't happen. Buy those over and over and you get a small chance of a big win and a big chance of losing the lot. Fine if you know that's the deal. Painful if you work it out afterwards.

Margin Call prices its chains with Black-Scholes and full Greeks, including the extra that real markets charge for downside puts. So both mistakes behave here just like they do in a real chain, and getting caught costs you nothing.