What are options - and why might you consider adding them to your investment mix? In this back-to-basics series, TradeKing’s Brian Overby explains options from scratch, from opportunities to risks. This post explains how an option’s name and quotes work. We’re going back to school, investors. In recent months TradeKing has opened its doors to thousands of new investors, many of whom are brand-new to the markets and curious about options. So far we’ve defined options, both calls and puts and explained how sports and movie contracts behave similarly to investment options.
Today we’ll tackle how options quotes work. It’s a sizeable topic, so I expect this will take two posts.
Most options for investment and trading are “standardized”. That means the underlying terms of the contract follow a standard format, and it’s all reflected in the name of the contract itself. Here’s a sample:
XYZ is the ticker symbol for the underlying security – in this case, let’s say it’s a stock. You’ll also find options based on indices, exchange-traded funds (ETFs), and other instruments. For standardized options, each contract represents 100 shares, or a round lot, of the underlying.
January is when this option will expire. As noted above, the last trading day for most options is the third Friday of the month.
70 is called the “strike” price. If the option gets exercises, the stock will change hands at $70. 70 is a magic number to watch as prices on the underlying fluctuate either above or below this price level. More on this in a future post.
Call is what kind of option this is. Again, a call buyer has the right, but not the obligation, to buy stock XYZ at 70. That right expires on the third Friday of January.
$3.10 is the option premium, or option price. That’s the amount the option buyer spent to buy this call. Since the call represents 100 shares of the underlying, you’d actually multiply 100 x $3.10, or $310 plus commissions of $4.95 plus 65 cents per options contract at TK.
Seen from the POV of the option seller, $3.10 is the amount of premium collected for selling this call. (Again, you’d multiply by 100, then subtract the same commission, for the exact amount the seller collects on this sale.) In exchange for that $3.10, the option seller takes on an obligation: to sell stock XYZ at 70 if the buyer exercises their option and the seller gets assigned to make good on their obligation.
Options do have their own ticker symbols, which we’ll discuss in my next post. But unless you trade one underlying and its options religiously, the options ticker symbol may not trip off your tongue as easily as you’d say “MSFT” for “Microsoft”. Often traders name your option in the manner described above – as in, “I just bought the XYZ Jan 70 call for $3.10.”
Keep in mind that XYZ probably has not just one option, but several available simultaneously. There will likely be other XYZ-based options contracts trading with slightly different terms: different strike prices and expirations, on both the put and call side. So looking up the options quote on XYZ involves checking out many quotes, not just one. That information is displayed in what’s known as an “options chain”. We’ll dig into options chains in my next post in this series.
Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com
[image: School Room by Rob Shenk on Flickr]
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