Option chain explained - How to setup, use, & read an option chain - Options Trading Tutorial - TOS

What's going on everyone this is Brendan from The Trading Fraternity and in today's video I'm going to be going more in depth on the option page in thinkorswim and show you my option chain setup that I actually use on a daily basis. This tutorial was actually requested by one of the citizens in the chat room after they watched my basic setup for thinkorswim so if you guys haven't seen that yet and just want a brief walkthrough on TOS go ahead and check that out you'll find it in our tutorial section and as you can see on my screen today I'm going to be walking through on a brand new paper trading setup so you new guys can do this with me okay so let's get things going here obviously you see that I'm on the trade page in all products and this is where you're going to find your options okay so I already have a stock typed in I have Facebook you can type in whatever you want and I'm just going to go through the top to the bottom here okay I'll just work my way down so let's get started with the underline here. Underline is information that's on the underlying stock it's pretty self-explanatory right so we have the last transaction we have the net change you got the bid and the ask you got the size of the bid and the ask you got the volume which is how many shares that went in on the actual stock throughout the day you have the opening price high a day and the low a day so that's actually really nice to have right here while you're looking through your option chain so you can keep an eye on the stock itself personally I like to use the next section which is the trade grid right here because I like to actually have an actual chart up of the stock so what I do is since Facebook here I have it synced to red I'm going to sync this chart to red also so let me do that and as you can see it comes up with the level two and what I'm going to do I'm going to change this by hitting the symbols action right here have a little drop down go to gadget and we're going to go to chart right here and as you can see I have a one-year chart that pops up for the time frame I'm going to change this to one day five minutes that's just my preference right here so now I'm able to keep an eye on stock while I'm taking a look at the option chain what else I like to do I like to create a chart for my actual options that I'm looking at so to do that I'm going to change this one right here the symbol link to lala which is at the bottom here okay and as you can see it gives me a level two again what I'm going to do click the settings again and go to gadget and chart it looks like I have an option already preloaded so what I'm going to do is just take this backspace enter all right so we're finally at the option chain here I'm actually just going to go right through here from the beginning to end as you can see on the left side here each contract shows a date and if you guys don't know about options yet every contract expires on Fridays the typical ones there are SPYs and there are the SPXs that do have like the monthly not the monthly the contracts and the Wednesday contracts but the typical options they expire on Fridays and you can always check the date on these by looking right here and you can always look at the parentheses on these on the numbers for each contract if that makes sense so you see there's three days to expiration 10 days 17 days 24 so on and so forth right there so that is pretty useful so it gives you a little basically a little timer when these contracts expire now as you can see these contracts are actually color coordinated the white ones are your traditional monthly contracts and the yellow ones are your weekly contracts so typically I like to stick with the monthly ones or at least 30 days when it comes to trading my options okay um let's open one of these guys up okay so I'm gonna open up the monthly for October and as you can see only opens up four contracts so what I'm gonna do is I'm gonna open this up just a little bit more and you can click the strikes right here the drop down do whatever you want like I said in the TOS video I like to do 20 to 40 so let me just type that in all right cool so it's uploaded right now and let's just go through the chain here um as you see as I click the October monthlies it shows the date and here's the strikes right here so it shows from 19 to 38 obviously I have 20 strikes open um the left side is your calls and you can always check on the left side it has calls right here the right side is your puts right there and the purple is in your money in the money not in your money but and the black ones are out of the money and you can see on the put side also in the money it's purple black is out of the money and you can see the what's called the in the money contracts hold the most value because you can actually exercise those for 100 shares compared to the ones that are out of the money they are going to be cheaper because you're putting on more risk of those actually expiring worthless so let's move on here you can see my chain itself is pretty bland here when you first get your thinkorswim and all it shows is your bid and your ask your net change in your last transaction I'm gonna actually give you my setup I actually wrote out my whiteboard here so let me just go down the list for you and if you guys want to change this you click the layout right here go to customize all right so that pops up for me so the first one I do I actually use net change so what I'm gonna do is I'm gonna drag the last transaction down here and the next one I like to use is volume the one after that I like to use open interest and what I do the next one is actually the last transaction which is last x so what I do is just drag it down here the one after that I like to use the mark and if you guys aren't familiar with this I am going to be explaining this in just a second so the last two is delta and theta so whenever you get your list of what you want on your chain and you don't have to necessarily use mine you can do whatever you want there's always a huge list there's always different ones to pick from okay so after you want your list you push okay it's going to update your chain here so there we go so I'm just going to go down go down the list of why I choose what I have on my chain so the net change I like to use this actually over percentage change because as you know in options they are extremely volatile so you're it's pretty normal to see between 50 to 100 differences and it can be kind of blinding for me it is at least so I like to concentrate on that change because I'm able to concentrate on the actual value of the contract itself so moving on from that I the volume here as you can see is just like the underline up here you saw the underline the volume up here is how many shares that went in on the underlying stock you can see how many how much contracts went through on the volume throughout the day so that's pretty cool I use it and part of my training not training but trading to actually see what is going on as you see right now for today the 130s were pretty popular out of the strikes right there so that can just show you if there's a demand or not the next one is open interest kind of like volume open interest it shows you how many contracts that people actually own it right now so the open interest on these 130s is 47,000 close about 48,000 right there so that's over time right now that's how many contracts that people are holding and obviously we're going to see 10,000 more you just got to check the open interest tomorrow to see if these are added to it or not so to move on is last transaction for me I like to get cheaper options than the last person that bought in front of me so that's what I actually like to have beforehand mark right here it's a pretty important part of my trading it is the halfway point between your bid and your ask so you have 13 cent to 18 cents right there so the halfway point between these two is going to be 16 cents about 17 cents right there really but it's the halfway point so what I like to do when I limit and like I fish out limit orders when I buy my contract so I'm going to show you I'll buy a contract so I click the ask and if I want to buy this I'm going to get close to the mark right here so obviously this is a tight spread so this is kind of a bad example but I'll fish it between like 16 to 18 so I would send an order for 17 cents and you know what I'll actually just pull up a better stock than this I'm gonna do like a wider one like Google's prime example all right so I'm going to be looking at the 825s here they're two dollars a contract about 245 to 265 so I'm going to click this right here and if I want to get in between the spread here when I want to limit my I mean when I want to fish my limit orders out there I look at the mark which is two dollars and 54 cents maybe two dollars and 55 cents if you're rounding up so what I do is I adjust it to 255 I might even fish it out for 260 right there if I'm being generous to the market maker because that's part of my trading style I like to haggle with the market maker and try to actually get discounts so moving on from this the next part is the Greeks right here which is I only use the delta so which delta means when it comes to options is per dollar move like the gain or loss so looking at these 825s here so if the underlying stock of Google goes up a dollar the contract is going to gain 23 cents which is 23 dollars on the actual contract and if it goes down a dollar it's going to lose 23 cents so and as you can see as it gets closer to being in the money the delta goes up because it shows more value and all that like just like how I said when it came to the contracts are in the money they hold the most value because they're able to be exercised for 100 shares so if you guys are not familiar with the Greeks we are creating a tutorial on that so look out for that soon okay and the next Greek that I use on my chain is theta which is time decay which is very important part here as you look at the contracts they all do expire at some point so these have 10 days till expiration so I want to calculate how much is this contract going to lose over time so obviously it shows 27 cents so that's always something to keep an eye on especially if you're building swing trades or even if you're going to be looking at you know your weeklies you know if you have a contract during this time right here you have to kind of play hot potato here because it's about to expire worthless out of the monies and as you can see the 825s here on this one is definitely a lot cheaper see the 75 cents compared to about a week out which is $2.65 so that pretty much wraps up the option chain setup for what I have like I said you guys can do whatever you want this is just what I use on a daily basis and it helps me out so let me just close these up here and we'll move on just like in the basic setup video I went over to statistics here this is where you're able to see the volume on the day for calls and puts right there you can compare it so on the for google today 17,000 went in on the calls 14,000 went in on the puts you can actually see the statistics wise to see how much was traded on the bidder below the asker above between the market you can always calculate the deltas right here and look at your IV which is your implied volatility you got your VWAP right there also and you have your sizzle indexes which I don't typically use itself because I concentrate more on the stock movement than anything oh I forgot to go over looking at an actual chart for your option so let me open back the monthlies here so obviously we made a chart up here earlier to look at options and if I want to do that if I want to look at the actual chart for the day I right click it and I go to send you see the contract down here send to laloc and boom right there I'm not sure what time frame this is but so I'm able to see how much like pretty much the contract fluctuated throughout the day when it comes to transactions and you can always expand this to a different time frame five day five minute so you see for the five day low for these contracts are a dollar ten they're about you know as if you look at the market they're about two dollars and fifty five cents so that's they're pretty much up on the day but you have to like I said you have to compare it on the actual underlying stock to see what has happened so to move on from this we were at statistics I'm gonna go to option time and sales which is personally my favorite part when it comes to analyzing option orders that I actually see on twitter throughout the day so I follow speedy calls I follow wall street jesus I follow options hawk all basically all the option guys on twitter and you know the ones that spit out option data and I actually like to go through the actual transactions throughout the day here and that's a cool part because you see every single option transaction from the beginning to close whether if it's a call put and all that and if you guys want to actually filter the contracts itself you can just click right here the filter button you can do it by series strikes whatever strike you're looking at whatever time frame you're looking at it's all good to go even quantity if you wanted to do and if you want to look at the biggest transactions throughout the day they are right here obviously we see on the calls the biggest transaction was the october 790 calls 100 lot for 20 so that's a big order right there and of course on the puts also so let me just close this up I am creating a tutorial I don't want to keep plugging myself when it comes when it comes to these tutorials but I am actually creating a tutorial on analyzing option orders pretty soon so look out for that also so let me close this up last but not least product depth so this gives you a visual of what's going on in the option chain so obviously when I have this it shows your impliability personally I like to use either open interest or volume so I usually use volume because it gives me a visual of what is the action going on and you can see whatever is popping out see if you hover over it the october 820s had the most volume for the day for the call activity on the put side the october 800s so that just gives me a visual right there so to pretty much wrap everything up here this is basically my setup and hopefully this guys helped you out um like I've been telling everyone in the chat room please tell me what you guys want to do when comes to tutorials I'm more than glad to actually make it for you guys and that's pretty that's pretty much it so it's just to wrap things up you guys have a great night okay take care