The power of options lies in their versatility. They give you the power the adjust your position according to the present situation. However just like any other security, options have their own set of problems. Options are complex securities and can be sometimes extremely risky. Option trading is therefore not for everyone. However if you do decide to trade in options, the first thing you should know is how to read the options table.
Before taking a look at an options table, let us understand what are options and what are calls/puts.
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security.
The two types of options are calls and puts.
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.
A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
A call option is in-the-money (ITM) if its strike price is below the current price of the underlying stock. A call option is out-of-the-money (OTM) if its strike price is above the current price of the underlying stock. A call option is at-the-money (ATM) if its strike price is the same as (or close to) the current price of the underlying stock. The opposite applies for put option.
This options table displays a random company TSX at current price $20.15, along with 7 columns.
The first column represents the Strike Price. This is nothing but the price at which an underlying stock can be purchased or sold. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. Option strike prices typically move by increments of $2.50, $5.00 or $10.00.
The second column represents the Expiry Date. This shows when the option contract will expire. Once the contract expires, the options have no value and cannot be exercised. U.S.-listed options expire on the third Friday of the expiry month.
The third column represents whether the option is a Put (P) or Call (C).
The fourth column represents Volume. This indicates the total number of options contracts traded for the day. The total volume of all contracts is listed at the bottom of each table.
The fifth column represents Bid. This indicates the price someone is willing to pay for the options contract.
The sixth column represents Ask. This indicates the price at which someone is willing to sell an options contract.
The seventh column represents Open Interest. Open interest is the number of options contracts that are open; these are contracts that have neither expired nor been exercised.
With this simple knowledge, you are ready to trade in options.