A beginner’s guide to reading options chains

04/03/2023 By Qin

Options trading is a powerful tool that allows traders to gain exposure to an underlying asset without owning it. It also provides them with numerous exciting opportunities that they can take advantage of. Reading and understanding an options chain is essential for those in Singapore interested in engaging in options trading. This article will provide a comprehensive guide on how to read an options chain for beginners in Singapore.

Understanding the options chain

The options chain is a table of information that includes all the available option contracts for a given asset. It may also be referred to as an “options matrix” or “quote board.” This table contains essential data, including the strike price, expiration date, last trade price, and more. The columns will often have different headings depending on what type of options chain you are looking at. Moreover, the rows will vary depending on the type of options contract.

Identifying the different types of options

The two primary option contracts are calls and puts. A call gives buyers the entitlement to purchase an asset at a specific price, while a put gives them the liberty to sell an asset at that same predetermined price. Understanding the difference between these two is vital before reading an options chain. Additionally, there are two types of options based on the expiration date: American and European. Traders can exercise American-style options any time before expiry, while traders can only exercise European options upon expiry.

Knowing what to look for in an options chain

You must understand the various columns and contents when reading an options chain. The primary information to keep an eye out for are the strike price, bid/ask prices, implied volatility, open interest, and volume. The strike price is the predetermined price at which traders can buy or sell a contract based on whether it’s a call or a put option. Bid/ask prices refer to the highest amount someone is prepared to pay when buying an asset and the minimum someone is prepared to sell it for. Implied volatility is a measure of risk in the market, open interest tells you how many contracts are currently outstanding, and volume reveals the number of contracts that have been traded.

Calculating your break-even points

Knowing your break-even points can help determine when it’s time to close a position. This calculation will vary depending on whether you bought or sold an option contract, so ensure you understand which side of the trade you’re holding before attempting this calculation. For example, if you bought a call option at a strike price of SGD100 with a premium of SGD1, your break-even point would be SGD101.

Analysing the Greeks

The Greeks are a series of metrics traders use to measure and analyse options contracts. They include Delta, Gamma, Theta, and Vega. Delta measures how much the option price will move relative to small movements in the underlying asset’s price; Gamma measures how much delta changes when there is a little movement in the asset’s price; Theta is used to measure time decay. Vega tells you how much an option contract will move if the market is volatile. By studying these metrics, traders can gain insight into potential risks and rewards for different strategies.

How traders benefit from reading options chains

There are several benefits to reading option chains in Singapore. By understanding the basics of an options chain, traders can assess potential option strategies and their associated risks.

Developing an understanding of the markets

Traders can better understand the various components involved in trading by familiarising themselves with options chains. It includes the different types of contracts, their strike prices, and expiration dates. It also helps them become more aware of implied volatility levels and open interest, providing insight into potential market movements.

Improving risk management skills

Options chains help traders develop their risk management skills by allowing them to assess potential risks associated with specific strategies before entering a position or closing one out. They can use the Greeks to understand how much risk they take for each trade. Additionally, break-even points give traders an insight into when it’s time to close a trade so they can maximise their chances of doing well.

Gaining an edge in trading

Reading options chains gives traders an edge in the markets by giving them insight into the potential price movements of assets. It helps them make more informed decisions when entering and exiting trades.