The chain: bid, ask, volume, open interest

In short

A friend of mine once asked me why his option order sat there all afternoon and never filled. He had picked a fair price, or so he thought. He had not looked at the bid, the ask, or how many people were trading that contract. If you have ever stared at an options chain and felt lost, you are in good company. Four columns tell most of the story: bid, ask, volume, and open interest. The bid is what buyers will pay right now, and the ask is what sellers want right now. Volume counts the contracts traded today, and open interest counts the contracts still alive. A wide gap between bid and ask is a cost, so look at it before you place an order. Reading these four columns takes an hour of practice, and it can spare you a good deal of frustration.

The whole of it

What it is

I once watched a neighbor sell a used truck on the side of the road. He had a number in his head, and a buyer had a lower number in his. The deal happened somewhere in between, or it did not happen at all. An options chain is that same roadside haggle, laid out in rows for every contract on a stock.

An option is a contract. One contract usually covers 100 shares of the underlying stock. A call gives its owner the right to buy those shares at a set price, and a put gives its owner the right to sell them at a set price. That set price is called the strike. The contract also has an expiration date, after which it ends.

The chain is the list of all those contracts for one stock. Each row is a strike price. Each column is a piece of information about that contract. Calls usually sit on one side of the page and puts on the other. You will see the four columns this guide covers: bid, ask, volume, and open interest.

How it works

A friend of mine who ran a hardware store used to say that every price has two sides. There is what you pay, and there is what you get when you sell back. Options work the same way. The bid is the highest price a buyer is willing to pay right now. The ask is the lowest price a seller is willing to take right now. The ask is always higher than the bid. Two prices, one contract.

Here is why that matters to you. If you want to buy, you usually pay near the ask. If you want to sell, you usually receive near the bid. The gap between them is called the spread, and it is a real cost. It does not show up on a statement as a fee. It shows up as the difference between what you paid and what you could sell for a moment later.

Most options are quoted per share, but one contract covers 100 shares. So a quote of $1.50 means $150 for one contract. Keep that multiplier in mind every time you read a price.

Now to the other two columns. Volume is the number of contracts that traded today. It starts at zero each morning and climbs as the day goes on. Open interest is the number of contracts that are open and not yet closed out. It is updated once a day, so it does not move while the market is open. Volume tells you about today. Open interest tells you about the long run. A contract can have high open interest and low volume today. It can also be the other way around.

Why do these matter to your wallet? A contract with a lot of trading usually has a tighter spread. A contract with almost none can have a wide one. Thin trading means fewer people on the other side of your order. It might fill slowly, or at a price you do not like.

The numbers, and where to find yours

You have probably noticed that every brokerage shows these columns a little differently. The bid, ask, volume, and open interest for your contract are on the options chain page of your own broker. Pull up the stock, choose an expiration date, and pick a strike. The four numbers will be sitting right there.

Some figures are set by rule, and they change by year or by exchange. Your broker charges a fee for each contract, and the amount differs from one firm to the next. Look for the line on your broker's commission page, often called the per contract fee. The exchanges also set the size of the smallest price step, called the tick. The Options Clearing Corporation, which stands behind every listed contract, publishes the contract terms. Its disclosure document, called Characteristics and Risks of Standardized Options, explains what you are agreeing to. Your broker has to give you a copy before you can trade options. The rule on that document comes from FINRA, the industry regulator, and the filing home for the underlying rules is the Securities and Exchange Commission. Read it once, slowly.

For your own contract, write down four numbers before you do anything else: the bid, the ask, today's volume, and the open interest. A small notebook works fine.

A worked example

Let me tell you about a woman named Marcy. She is a retired schoolteacher with a steady hand and a careful mind. She wanted to understand how a call contract on a company she followed was priced, so she opened the chain and looked at one row.

The bid was $1.20. The ask was $1.60. Volume today was 12 contracts. Open interest was 85 contracts.

First she looked at the spread. The ask of $1.60 minus the bid of $1.20 is $0.40 per share. Since one contract covers 100 shares, that is 100 shares times $0.40, or $40 for the full contract. That was the gap between buying and selling right away.

Next she figured the midpoint, which is a fair guess at the middle. The bid of $1.20 plus the ask of $1.60 is $2.80, and half of $2.80 is $1.40. So the midpoint was $1.40 a share. For one contract, 100 shares times $1.40 is $140.

She also saw that the spread was about 29 percent of the midpoint. She got that by taking $0.40 divided by $1.40, which is about 0.29. That is a wide gap. Marcy noticed that the volume was only 12 and the open interest was 85. Few people were trading this contract, and that matched the wide spread.

She did not rush. She looked at the next strike over. There the bid was $0.90 and the ask was $1.00, a spread of only $0.10. Volume was 340 contracts and open interest was 2,100. Same stock, same date, far tighter gap. Marcy learned something real that afternoon. The columns were telling her how easy or hard it would be to get in and out.

If she had placed an order at the ask of $1.60 and wanted out a minute later, she would have received near the bid of $1.20. On one contract, that is a loss of $0.40 times 100 shares, or $40, before the stock moved a penny. She had not bought anything. She had only learned how the chain works, and that was worth the afternoon.

Where it goes wrong

I made a mistake once that I still think about. I looked at a price on a screen and treated it as the price I would get. It was not. It was the last trade, which might have been hours old. The bid and ask are what is live right now. The last price can mislead you.

Another trap is the order type. A market order says, fill me at whatever price is out there. On a thin contract, that can mean a bad price. A limit order says, fill me at this price or better. A limit order gives you control over the price, though it may not fill. That was my friend's trouble with the afternoon that went by.

Open interest gets misread too. Some people think a big number means a contract is a good idea. It only means many contracts are open. It says nothing about whether they will win or lose. Volume works the same way. Busy does not mean wise.

Then there is the contract multiplier. A quote of $2.00 looks small until you remember it means $200 for one contract. Many a new trader has been surprised by that. Four words cover it: check the math twice.

Last, expiration. An option has a set life. When the date passes, the contract ends. The buyer can lose the entire amount paid for it. That risk is spelled out in the Characteristics and Risks of Standardized Options document, and it is worth reading before any order goes in.

Questions to answer before you leave this page

Can you point to the bid and the ask on a chain and say what each one means? When you subtract the bid from the ask and multiply by 100, what does that spread cost for one contract? Do you know the per contract fee your own broker charges, and where it is listed? Have you read the Characteristics and Risks of Standardized Options document that your broker must provide? If a contract has a volume of 12 and an open interest of 85, what does that suggest about how easily it will fill? Would you place a limit order or a market order on a thin contract, and why? Do you know the date your contract expires, and what happens to it then? And have you written down the four numbers for your own contract before going any further?