What is an Option Chain and How Do I Use It?

An option chain is a listing of all available option contracts, both puts and calls, for a given token. But how do I read it?

Author

Weka
June 01, 2024

An option chain is a listing of all available option contracts for a given token.

Though it may seem like a daunting matrix of numbers at first, the option chain provides valuable information that’s not readily available on Premia’s simplified classic view.

And so, on your journey of becoming an options savant, understanding the option chain and how to use it is essential.

In this article, we’ll talk about the properties of an option chain alongside actionable examples and instructions for using it on app.premia.blue!

Before delving into this article, we recommend completing the Options 101 and Greeks courses inside the Premia Academy unless you’re already familiar with these topics.

What is an Option Chain and How Do I Read It?

An option chain is a listing of all available options for a given token. It includes various every essential data point familiar from the classic view, such as strike prices, expiration dates, and pricing information for both call and put options.

That’s not all: when using the option chain, you’ll be able to trade and view every single liquid option on the same page. This makes it super easy to compare pricing or conduct general analysis for the available options for BTC or ETH for example.

Besides the basics, the option chain also displays the following information:

  • Open Interest: The value of all open positions for a specific option.

  • Volume: Total trading volume of an option

  • Theta: Measures the rate at which an option's price decreases as time passes, holding all other factors constant.

  • Delta: Measures the degree to which an option is exposed to shifts in the price of the underlying token.

  • Bid Price: Refers to the highest price that traders are willing to pay you for an option. Click on a Bid price when you want to sell an option.

  • Ask Price: Refers to the lowest price that traders are willing to accept to sell you an option. Click on Ask price when you want to buy an option.

I know it’s an eyeful and it’ll definitely take some getting used to, but I wholeheartedly recommend familiarizing yourself with the option chain if you trade options actively on Premia Blue.

But how do you trade using the option chain? Let’s walk through it!

Using The Option Chain

Step One: Checking The Chain

Firstly, you’ll want to switch to the Option-Chain view from the top-right corner inside app.premia.blue.

Choose the token pair you wish to trade. Now, it’s time to check the chain. An option chain is filled to the brim with essential information. Once you’ve taken it all in and decided on what option to buy, click on the Ask price of that option.

Example: I think ETH will reach $4,000 during June. I’ll purchase a WETH call option with a strike price of $3,800, expiring on June 21st.

Step Two: Setting Orders and Confirmation

Traders on Premia Blue can choose from two types of orders: market orders and limit orders.

  • Limit Orders: Allow users to set a specific size and a limit price for their trade. For example, I could set a limit order for the WETH-21Jun-3800-C option at a price of $200 as opposed to the current market price of $229. If the option reaches the price of $200, the order will be automatically filled.

  • Market Orders: Users can purchase a specific amount of options at their current market price displayed on the option chain.

In this example, I believe the current price is fair, and so I’ll use a market order to purchase 2 WETH-21Jun-3800-C options for a total premium of 0.12 WETH.

Step Three: Management and Settlement

Now that you’ve purchased an option, you can manage the position inside the Portfolio page — just like when buying an option from the classic view!

Don’t be surprised if your newly opened position is already at a negative PnL; this is simply because you paid a premium for it!

By expanding a position you can also view more detailed information, such as The Greeks. However, the most basic function on this page is the possibility to close a position.

If there’s open quotes for the option, you can sell it — if not, you’re still able to utilize limit- and range orders with your option!

More on short options, vaults, and other topics in future issues. Thanks for reading my frens. Check out the Premia Academy for more educational content and cool badges!

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