THE OPTION CHAIN ROAD MAP
An Option Chain is simply a list of a stock’s: (See Handout #2)
#1 – option expiration dates,
#2 – Calls and Puts,
#3 – strike prices,
#4 – Bid and Ask premiums,
#5 – Volume,
#6 – Open Interest,
An Option Chain for over 2,700 individual stocks contains a series of PUT and CALL option premiums, arranged in columns.
and …. is updated constantly during trading hours.
Question #1 – Option Chains:
A.___are updated on the 3rd Friday of the month
B.___don’t offer much useful option information
C.___chain together all similar stocks
D.___list all information needed for trading stock options
An Option Chain for over 2,700 individual stocks contains a series of
PUT and CALL option premiums, arranged in columns.
Question #2 – Option Chains are arranged:
A.___haphazardly according to the brokerage firm
B.___alphabetically by stock name
C.___in columns by strike price, bid,ask,change,volume,open interest
D.___in profit/loss order
Answers: #1 – D, #2 – C
CLUES TO CHOOSING AN OPTION:
Trading does not occur in a vacuum.
Clues of what others are doing
can be extremely valuable to you.
CLUE #1: OPEN INTEREST – As soon as you uncover the hottest company
ever that is ready to skyrocket in price
check the stock’s Open Interest to see if anyone else thinks so.
Open Interest is the total number of option
contracts that EXIST at a given time. The number changes daily.,
For each buyer – there must be a seller
From the time a contract owner opens a contract
, until another party closes it — that contract is “OPEN”
When you are looking at Open Interest, there is no way
of knowing whether the options were bought or sold.
However, it gives you key information of the option liquidity.
The bigger the Open Interest, the easier it will be
to close your option contract at a good price.
Open Interest should probably be a minimum
of 3,000 contracts. If not, forget the company; you’ll
have a difficult time closing (getting rid of it) the contract
at the premium you want.
CLUE #2 : VOLUME – The number of contracts traded in a
Just like a stock, volume in an option measures the activity
of the option and represents the number of contracts
exchanged between buyers and sellers.
Question #3 – Open Interest and Volume are:
A.___important indicators of what other option participants are doing
B.___annoying figures that just add to the complexity of options
C.___indicates the sound system required for options
D.___Indicates the option chains open and close hours.
CLUE #3: EXPIRATION DATE – How long do you think it will take
your stock to break the price sound barrier?
There are weekly and monthly expiration dates
Only chose a MONTHLY date.
Question #4 –What happens when an option expires?
A.___You can trade it in at no cost.
B.___You join a forum and rant about it
C.___It’s probably worthless and you lost what you paid
D.___You order it again and give it a second chance.
CLUE #4: STRIKE PRICE — Strike prices are established when a contract
is first written, usually in increments of
$2.50 and $5.00. Strike Price is the fixed price at which
the owner of an option can buy(ask) or sell (bid)
the underlying stock.
Prices in the Option Chain are LOW at the top of the
column and go up in price to bottom of column.
CALL strike prices are highlighted from the current stock price
UP to the top of the column. PUT strike prices appear to be
upside down to the bottom of the column.
Question #5: – The Strike Price
A.___is established when a contract expires.
B.___is a flexible price once ordered.
C.___is stated in a series of 3 strikes.
D.___is a fixed price of the underlying stock.
ANSWERS: #1:D — #2: C –#3: A — #4: C — #5: C
JUST ONE MORE THING …..
The art of IN … OUT… AT
The yellow hi-lited area of an option chain marks the
Strike Prices that are in-the-money; which are
more expensive than
option premiums that are out-of-the-money.
INTRINSIC VALUE (built in value) is the amount of value
in the option premium that is in-the-money.
So, if a Call option contract has a strike price of $50.00
and the stock is trading at $60.00 – there is $10.00 of
Intrinsic Value built-into the premium price of the option.
(Intrinsic Value the glass is full.)
(ITM) = In-the-Money — Stock is ABOVE strike price
(Stock @ $14.05 – Strikes $13.00, $12.00, $11.00)
(OTM) = Out-of-the-Money — Stock is BELOW strike price
(Stock $14.05 – Strikes $14.00,$15.00, $16.00
(ATM) = At-the-Money –Stock is the SAME as strike price
(Stock @ $14.05 – Strike $14.00
PUTS ARE JUST THE OPPOSITE!
(ITM) = Stock is BELOW strike price
(Stock @ $14.05 – Strikes:$15.00, $16.00, $17.00)
(OTM) = Stock is ABOVE strike price
(Stock @ $14.05 – Strikes $13.00, $12.00, $11.00)
(ATM) = Stock is the SAME strike price
(Stock @ $14.05 – Strike $14.00)
Question #6 — Stocks are in-the-money:
A.___when they are backed by cash.
B.___when they have expired.
C.___when the stock is above the strike price.
D.___when they mature.
Question #7 — If a stock is $14.05, the in-the-money PUT is:
D.___at a clearance price.
Answers: #6: C — #7: A.