The contract

The anatomy of a contract

Every listed option is defined by four things you must be able to read instantly:

1. Underlying — what the option is on (a stock, an index like SPX, an ETF like SPY).
2. Type — call or put.
3. Strike — the fixed price at which you can buy (call) or sell (put).
4. Expiration — the date the right ends.

A single line like "SPY 500 Call, exp. Friday" fully specifies the contract. Everything else — its price, its Greeks, its behavior — flows from those four facts plus the market.

The multiplier

One equity option contract almost always represents 100 shares of the underlying. This is the multiplier, and forgetting it is a classic beginner error.

Index options (like SPX) and futures options carry their own multipliers — SPX is 100 as well, but its point value makes each contract far larger in notional. Always know the multiplier before you size.

Exercise and assignment

Exercise is when the option owner uses their right. Assignment is when a seller is chosen to fulfill the obligation. Two flavors matter:

Settlement also differs. Physically settled options deliver actual shares (exercise a SPY call, you receive 100 shares). Cash settled options just pay the difference in cash (SPX never delivers an index — it pays the points). This distinction is not trivia: it changes how the biggest players use each product, and therefore where the heaviest dealer positioning sits.

Reading the option chain

The chain is the grid brokers show: strikes down the side, expirations across the top, calls on one side and puts on the other, each cell showing bid, ask, volume, open interest, and often the Greeks. Learning to scan a chain is like learning to read sheet music — at first it is noise, then it is obvious. Two columns to notice early:

• Volume — contracts traded today. A flow snapshot.
• Open interest — contracts that exist and are still open. A positioning snapshot. This one, aggregated with the Greeks, is where GEX begins.

Common mistakes

• Forgetting the ×100 multiplier and mis-sizing a position by two orders of magnitude.
• Assuming everything settles in shares. SPX and index options are cash settled — there is no stock to receive.
• Holding a short American option carelessly near a dividend or expiry, where early assignment can surprise you.

Reading a real chain, line by line

Open any option chain and it looks like a wall of numbers. It is not — it is a table with a simple logic, and once you can read one row you can read all of them.

Each row is one strike. Move down the rows and you move along the price ladder: 495, 500, 505, and so on. Somewhere in the middle sits the strike nearest the current price — the at-the-money row, where the most interesting behaviour concentrates. Each column tells you something different about that strike.

• Bid and ask — what you can sell at and what you can buy at. The gap between them is your immediate cost of entry.
• Last — the price of the most recent trade. Useful, but stale: on an illiquid strike it may be hours old and nowhere near the current market.
• Volume — contracts traded today. A flow measure: it resets every session.
• Open interest — contracts that exist and remain open. A positioning measure: it accumulates and persists between sessions.
• The Greeks — delta, gamma, theta, vega. Most platforms show at least delta. These are the behavioural columns, and Part 1.2 is devoted to them.

The habit worth building right now is scanning for where the size is. Run your eye down the open-interest column and notice which strikes carry far more than their neighbours. Those concentrations are not random: they are where the market has taken real positions, and therefore where dealers carry the most risk to hedge. You are looking at the raw material of every level GEX Levels draws — before any of the maths is applied.

Early assignment — the one thing that surprises sellers

Buyers of options control the timing; sellers do not. That asymmetry produces the most common unpleasant surprise in options: being assigned when you did not expect it.

With American-style options, the owner can exercise at any moment. In practice, early exercise is rare, because exercising throws away whatever time value remains — usually the holder is better off selling the option instead. But there are specific situations where it becomes rational, and if you are short the option you are the one it happens to.

The classic case is a deep in-the-money call on a stock about to pay a dividend. If the remaining time value is smaller than the dividend, the call holder can profitably exercise early, take the shares, and collect the dividend. If you were short that call, you wake up short 100 shares per contract with a dividend obligation attached. The second common case is simply expiry itself: an option that finishes even a cent in the money is normally auto-exercised, and a seller who forgot about a "worthless" position can arrive on Monday holding a large, unwanted stock position.

Strike selection — the practical geometry

Once you can read a chain, the next question is which row to trade, and the answer follows a geometry worth knowing rather than a preference.

Deep in the money behaves like the underlying with leverage. High delta, low gamma, low theta, low vega. You are essentially buying stock with less capital and a defined maximum loss. The trade is directional and the option mechanics barely matter.

At the money is the maximum-sensitivity zone: highest gamma, highest theta, highest vega. Everything is amplified. This is where you go when you want the option to behave like an option — convex, reactive, expensive to hold.

Slightly out of the money is the common compromise: meaningful delta, still substantial gamma, lower absolute cost. Most directional option trades live here.

Far out of the money is a different instrument altogether. Tiny delta, negligible gamma, and a payoff that requires an unusual move. Cheap per contract, which makes it psychologically attractive and statistically brutal.

The practical rule: pick the strike from the behaviour you want, not from the price you want to pay. "It only costs five cents" is a description of the premium, not of the trade.

How the chain changes shape with maturity

The same chain looks structurally different at different expiries, and recognising the shapes tells you a lot at a glance.

In the nearest expiry, premiums are small, the transition from out-of-the-money to in-the-money happens across a narrow band of strikes, and open interest concentrates tightly around the current price. The chain looks compressed. This is the expiry where gamma is sharpest and where a two-percent move rewrites everything.

In a monthly expiry a few weeks out, premiums are larger, the delta transition is gradual across many strikes, and open interest spreads across round numbers well above and below the market — the footprint of hedges and structured positions rather than day-trading. The chain looks broad.

In long-dated expiries, everything is expensive, deltas are compressed toward the middle, and open interest is thin except at a few institutional strikes. Gamma is negligible; vega dominates.

When you later look at a gamma heatmap across expiries, these three shapes are exactly what you are seeing stacked side by side — and knowing which shape belongs to which maturity tells you whether a level will survive the week.

A note on liquidity and the chain's edges

One practical warning that saves real money. The further you travel from the money and from the near expiries, the worse the quoted market gets — and the quotes at the extreme edges of a chain are frequently not real in any tradable sense.

A strike showing a bid of 0.05 and an ask of 0.40 is not offering you an option at 0.40; it is offering you an immediate 87% loss if you need to exit. Options at the far edges are often quoted by algorithms with no intention of trading in size, and the "last" price may be days old. Before treating any strike as tradable, look at its spread, its open interest and whether it traded at all today. The chain shows you every listed contract; only a fraction of them are genuinely available at anything like the displayed price.

• Four facts define a contract: underlying, type, strike, expiry.
• Multiplier is usually 100 — every quoted point is 100 dollars per contract.
• American/European and physical/cash settlement change who uses each product and where positioning concentrates.
• Open interest + Greeks across the chain = the raw material of GEX.