But fear not.
- By Investopedia Staff Updated Oct 25, The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, the expiration month and the strike price.
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It's really quite easy to decipher. Other companies, particularly those listed on the Nasdaq that may have tickers longer than three letters, are assigned base symbols that may or may not have any relation to the underlying stock's familiar ticker. The expiration month quick money business tells us, in a single letter, when the option expires and whether it's a call or a put.
The letters "A" through "L" are assigned to call option, with "A" denoting a January expiry, "B" denoting February expiry, and so on. Expiry takes place the third Friday of the associated expiration month.
Options Pricing: A Beginning
The strike price codes are a little more complicated, given that stock prices themselves can be all over the map. You'll also see three prices quoted.
The "Last Price" is simply what it says it is -- the last traded price of the option. However, this last price may have been at a very different price than what the next transaction will occur at.
Like any security, the "bid" price is what the counterparty is willing to buy the security for, and the "ask" price is what the counterparty is willing to sell the security for. With options, there can be substantially less liquidity in the market.
Consequently, you definitely need to watch the bid-ask spread. Stocks with a greater option volume and greater trading the strike price is 6 letters have a narrower spread. The stock currently has its bid and ask only one penny apart, meaning the bid-ask spread is a minuscule 0.
And Apple has some pretty tight bid-ask spreads. You'll note that call prices decline, while put prices rise, as the strike price on the option increases. This is as it should be. Invoking the old "bird-in-the-hand" idiom, you'd happily pay more for the one that comes with the built-in profit. We'll get to option pricing in our next article.
To employ option strategies, you need to know how to find and understand options pricing.
Finally, know that options are sold in contracts for shares. The last column in the table shows the "Open Interest" on that particular option -- the net number of outstanding open contracts.
An opening transaction occurs with an initial buy or sell of an option. A closing transaction takes place at a later date to offset the initial buy or sell.
An investor who initially buys a put option adds to the open interest. If the investor later sells that the strike price is 6 letters option to close out his position, it subtracts from open interest. Generally, we don't worry too much about open interest, with one exception -- if you're dealing in options where the open interest is only a few hundred contracts, it signifies that low liquidity I mentioned, likely leading to a wide bid-ask spread.
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Exercise and assignment Exercising an option simply means that the buyer of the call or put invokes the right to buy or sell the underlying stock at the strike price. When the option buyer or holder decides to exercise, the writer of the option is assigned an obligation to fulfill the terms of the contract.
The mechanics of matching an exercising option holder with an assigned option writer is handled behind the scenes by the options clearing corporation. Know, too, that exercise at expiry is generally automatic and handled by the options clearing corporation, but again recall that most option traders close out their positions with offsetting contracts prior to expiry -- unless expiry happens to be advantageous to the trader.
European or American? You may occasionally hear the terms "European" or "American" style options thrown around. These terms don't refer to geography, but simply denote differences in the stipulations attached to the options.
Which options should you buy? What strike price? What expiration date?
A European option is one that can onlybe exercised at expiry and not before. An American option is one that can be exercised at any time right up to expiry. Traded options that you'll find quoted are American in nature, although you'll find that early exercise of such an option usually doesn't make a lot of sense as for why, that topic's coming.
Reading option quotes is fairly straightforward, but prices often come with wider spreads than do much more heavily traded stocks.
Next up : You know how to get option prices. Now, what do they mean? Check out more of our options series here. Motley Fool Returns.