Entering an Order to Buy or Sell Options Investor Series, Part I

It’s good to understand specific option strategies and the reasons for adopting them, but for true rookies, something else is needed – and that’s an understanding of how to make a trade.  Each broker has its individual trading platform, but if you learn to use one platform, the general principles should transfer to another.  If there is a problem, your broker’s customer service department will explain anything that’s not clear.

This investor series will walk new options investors from start to finish through the process of placing an order to trade options. Part I answers the simple question, What Do The Numbers Represent?

UPDATE: PART II NOW LIVE

Before entering an order, let’s begin by examining a typical quote page from the CBOE (Chicago Board Options Exchange).  Below is information for some IBM options.

options-quote-screen

1. Calls. This is a (partial) list of call options that are listed for trading at the various options exchanges. The next six columns refer to specific call options.

  • The first row contains: 09 Apr 90.00 IBM (IBM DR – E)
  • 09 refers to the year in which the option expires, or 2009
  • Apr is the expiration month. For all options on individual stocks, expiration day is Saturday, one day after the 3rd Friday
  • 90.00 is the strike price, or the price at which the owner of this call option has the right to buy 100 shares of IBM. It is customary to ignore the decimals when they are ‘00’
  • IBM is the ticker symbol for the underlying stock
  • IBM DR is the symbol that describes the specific option. D represents the expiration month (April). R represents the strike price (90). The last letter is not part of the symbol. It’s used to designate the exchange from which market data is taken, and E stands for CBOE

2. Last sale. The most recent price at which the option traded. This number is seldom useful because you cannot tell whether the last trade occurred 5 seconds or 5 hours ago.

3. Net. This column shows today’s price change. It’s the difference between the last price and yesterday’s last price. This column serves no practical purpose. Red numbers indicate today’s price is lower, and green means higher.

4. Bid. The highest advertised price anyone is willing to pay for this option at this time. Be aware that the ‘real’ bid is often not published and that there’s a reasonable chance you can sell the option at a higher price.

5. Ask. The lowest advertised price that anyone is willing to accept when selling this option at this time. Be aware that the ‘real’ ask price is often not published and that there’s a chance you can buy the option at a lower price. When the bid/ask spread is wide, the chances of obtaining a better price (when you enter an order) are excellent.

6. Vol. (Volume) The number of option contracts that traded today on this exchange. If no exchange is specified, then it’s the total volume on all exchanges.

7. Open Int. (Open Interest) The total number of this specific option that exists. In other words, the open interest equals the number of options written (sold) that have not yet been bought back or exercised. This number is not ‘live’ and is published once per day, prior to the opening. Notice that the open interest tends to be highest for options whose strike price is nearest the stock price.

8. Puts. The same data is repeated for the put options.

  • Note: The option symbol has one major difference: The letter used to represent the expiration month is not the same as the letter used to represent the call expiration month. That’s convenient because you can determine whether an option is a call or put by its symbol. The letters A to L represent Jan thru December for calls. The letters M to X represent Jan thru Dec for puts. Thus, the first row contains the IBM Apr 90 put, symbol IBM PR. Where P = April expiration for puts
  • The letter representing the strike price is the same for calls and puts. IBM PR is the IBM put, expiring in Apr, strike price 90.

UPDATE: PART II NOW LIVE

Mark Wolfinger, @MarkWolfinger, is a 20 year CBOE options veteran and is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options:

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Comments

  1. lee e. anderon says

    a contract of 1 is a 100 share? how much does 1 contract cost if the stock trade for $25.00. What would be the profit if the stock rose to $28.50 by the thrid friday of the next month.

  2. says

    An option contract represents the right to buy or sell 100 shares of stock. Yes.

    For the stock you mentioned, I cannot give you the price of ’1 contract.’ First, you did not specify the stock. That is a crucial piece of information.

    Next, there are at least 12 call options and 12 put options that trade – and quite possibly more than that. You would have to know which specific option you want to trade (I can see you want to buy the call option).

    There are options that expire in four different months. There are also options with at least three different strike prices. The strike price of a call option is the price at which the call owner has the right to buy stock. So if you want to know what the option will be worth when the stock is 28.5, I must know if you are buying the call with a strike of 22.5, 25, 27.5, or maybe 30. And even that is not enough information to give you the option price.

    When you buy or sell an option (either a put or call), there are many choices. And each of them has its own market: a bid price and an ask price. just like you buy stocks, you enter a bid price for the specific option you want to buy.

    One suggestion: Do not enter a market order. A limit order is much better.

    this is not difficult to understand, but you want to see the information presented to you in a clear, logical sequence.