Options Trading: Reading the Chain

Posted On June 15, 2018 2:13 pm
By: Steve Smith

IMPLIED VOLATILITY

The fourth column in the table is Implied Volatility. This is a very important metric for option traders. Implied volatility is the only unknown element in the options pricing model, because we cannot know in advance how much a stock will move between now and expiration.

This value is an estimate, but the key thing to remember is that, just like a stock, we want to buy low and sell high.

We want to be a net buyer of options when implied volatility is low (options are cheap) and be a net seller of options when implied volatility is high (options are expensive).

DELTA

Delta is another important metric for option traders, so this is another column I like to include in the options table.

CUSTOMIZING THE INTERACTIVE BROKERS DEFAULT VIEW

It’s very simple to change the column headings within Interactive Brokers, simply click the spanner icon and choose the new headings that you want to include.

VIEWING MORE DATA

If you want to view more data than is just shown in these small screens, you can add various options to the main tab. You can add them one by one by left clicking on each strike. Alternatively, to add all the strikes within the expiry period, select Add All.

The only issue with this is that you end up with a bunch of options that nobody will be interested in trading.

There is a really simple method to get rid of all the “junk” strikes:

Make sure Delta is one of you headings. If not, simply click the spanner icon and add it as shown previously.
Sort by Delta.
Remove any options that don’t interest you (i.e. anything with Delta very close to 0 or 1.

This leaves you with a pretty good looking table of options. I’ve also highlighted below the column headings I use, you may want to set yours up in a similar fashion.

I usually like to add a few line breaks in between the calls and the puts, this is where my live orders will sit.

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Tagged with: options trading

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.