What are options - and why might investors consider adding them to their portfolio mix? In this back-to-basics series, TradeKing’s Brian Overby explains options from scratch, covering opportunities to risks. This post continues a discussion on options quotes, explaining options chains. Welcome back-to-school, investors! Recently TradeKing has attracted literally thousands of new investors, many of whom are brand-new to the markets and curious about options. This series is our attempt to get them started right.
So far we’ve defined options, both calls and puts, explained what sports and movie contracts have in common with investment options, and showed how an option contract’s terms are spelled out in its name. Today we’ll discuss a related concept, how to get options quotes using options chains.
As I explained last time, “options quotes” encompasses a bigger concept than a simple stock quote does. IBM may have one major “quote”, divided into bid and ask prices, for its stock, but it may have dozens of options quotes with IBM as the underlying stock. You can access this list, or “chain” of options quotes at TradeKing at Quotes + Research > Option Chains. (Don’t forget to login first.)
In the screenshot below, you’ll see IBM’s option chain.
See a larger version of this image.
First check out the search criteria at top. Because I knew my underlying ticker symbol (IBM), I plugged it straight into the search box. But if you don’t, you can always start at Quotes + Research > Quotes + News + Research, and use the “Symbol Lookup” text link to the right of the search box.
I used the default search criteria: I wanted to see near-the-money option contracts of both kinds (calls and puts), and I limited my search to the closest expiration month – in this case, Nov09.
What’s “near-the-money” mean? Well, to explain that we should first look at the IBM stock quote in the top center of our options chains. As of this writing, IBM was trading at 123.06. Some strike prices for options already have value, based on this underlying stock quote – for example, the 110 call gives you the right to buy IBM stock for $110, when the market price is $123. (To find the 110 call, check out the gray stripe at center – that lists the strike prices on IBM in this chain. You’ll see the 110 strike is right at top, with calls to the left and puts to the right.) Similarly, the 135 put gives you the right to sell IBM at $135; compared to a market price of $123, the put owner is sitting pretty.
Both the call and the put I mentioned above are “in-the-money” – based on the current price of the underlying, they have intrinsic value that could be immediately turned into cash, if the option holder chose to. That is, that put owner could immediately exercise and sell IBM for $135, even though everyone else has to sell IBM at $123. There’s $12 of intrinsic, in-the-money value in this put.
On the flip side, some options are “out-of-the-money”. It does me no good right now to be allowed to buy IBM for $135, if I can buy at the market price for cheaper, $123. Similarly, nobody gets too jazzed about being allowed to sell IBM for $110 if the market can fetch me a higher price, $123. These options are therefore “out-of-the-money” – they currently have no intrinsic value.
However, options have two types of value to consider. While only some of them have intrinsic value – they could be immediately converted into cash, based on the current underlying price – they all also have time value. Simply put, we have no idea what’ll happen to IBM’s stock price between now and 11/20, when the Nov IBM options will expire. During those 33 days, many of these options could go in-the-money (ITM) or most out-of-the-money (OTM), or swing back and forth between the two. That X-factor is reflected in an option’s time value.
You can see intrinsic and time values reflected in any option’s price. Check out the 135 call, the most out-of-the-money call in this chain. See the “Bid” and “Ask” columns to the left of the gray “Strike” column? As with stocks, the ask is the price you can buy at – in this case, 0.25 – and the bid is the price you can sell at – 0.20. Even though this option contract has zero intrinsic value now, it still has 33 days until expiration. In other words, it’s not worthless – it’s still got potential to move, which translates into time value.
Similarly, look at the very in-the-money (or ITM) 135 put, at bottom on the right. You can buy this put now for $12.80 (the ask), which gets you $12 of current intrinsic value. The other $0.80 can be chalked up to time value.
So far, we’ve talked about some of the columns in an options chain, but not all. What is “open interest”, “delta” or “IV”? And what’s with the funny options symbols like IBM.KB? I’ll unpack those concepts in my next post. See you then!
Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com
[image: class out by dcJohn on Flickr]
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