As options have become more and more popular, the trading volume in options has highly increased in the last few years. A huge role in this rise has been played by the development of electronic trading. The purpose of this article is to show you how to make sense out of an option table.
Before going any further, let’s get in touch with the nutshell definition of the option table terminology. When you buy a call, this means you have the chance to buy a stock at the strike price before it expires. If you sell a call, you must sell the stock at the strike price before it expires. Buying a put entitles you to sell a stock at the strike price before its expiration date. Selling a put forces you buy a stock at the strike price before its expiration date. The strike price is the price at which you can buy or sell the stock. The expiration is the date when the option closes.
In an option table, you will also see an open interest, which shows how many open option contracts are outstanding at the moment. The majority of traders will close their option prior to the expiration date in order to limit losses or to receive profits earlier.
The bid and the ask are two other concepts that you should understand. The bid is the sum that someone is willing to pay, and the ask is how much someone is willing to sell for. Now that you know how this terminology works, you are prepared to read the table and use it to develop your own option trading strategy.
If a random guy named Bob sells a put contract, then he is obliged to purchase 100 shares when the stock is below the strike at the expiration date. Also, if Bob buys a put contract, he can sell 100 shares at the strike price. This would be profitable if the stock’s price is below the strike, so Bob could sell the stocks for more than they are worth at that moment.
If Bob sells a call contract, then he will be obliged to sell 100 shares if the stock is above the strike at the expiration date. Furthermore, if Bob buys a call contract, he then has the option to buy 100 shares at the strike price. It is profitable to do so if the stock’s price is above the strike so that he could buy the shares for less than the stock is trading.
Types of options
There are two main types of option contracts that the trader can choose from: American and European. There is no relation between their names and the geographical locations. The difference is that American options can be exercised before the expiration date, unlike European options. From this point of view, American options are more advantageous, especially for the inexperienced trader.
All in all, options trading has come a long way in our day and age, and the option table is the living proof of this.