The Option Chain
The option chain is the parabolic curve presented in the form of prices. It is the vehicle that you will use to execute your trades and you need a though understanding of how it works. This chapter will explain it in detail.
Let's review the basic premise of the last chapter before the option chain is presented.
The option model expands in all directions. The greatest volume of air (Vega) in the model will be at the spot that has the least degree of certainty, which will be the at-the-money strike (ATM). As we move further away from the at-the-money strike (ATM) in either direction, the uncertainty will become less, and we will have more information to make our decision. The ATM money option has no intrinsic value, and therefore it is all air. The more air that is pumped into the ATM, the more that spills into the other parts of the balloon, the other strike prices. Figure 8.1 and Figure 8.2 combine our first look at the option chain with the binominal distribution curve. The sample option chain is for Priceline Inc., one of the highest-priced stocks trading today. This particular option chain is a weekly chain that expired on Friday, April 25, 2014. The stock closed at exactly $1,230 a share on April 22, 2014. The Priceline option chain is located below the binomial distribution curve.
A couple of things should instantly stand out.
Since the underlying stock closed at exactly $1,230 per share, we can identify the ATM immediately—it has to be the 1230 ...