With the value of stock options the lowest in years, this is the time for beginners to invest in options. Many people avoid this opportunity because they feel that they are not intelligent or educated enough to manage options, or they fear that they may lose a lot of money by investing. However, a little education goes a long way, and stock options can be a worthy investment for those willing to put in a little time to research the ways of the stock market. One way to obtain an education in options trade is to research options chains.
Stock options, usually referred to as simply “options,” can be defined as the ability to buy one hundred shares of any given stock at a specific price and time. There are two main types of options: puts and calls. Call options are contracts that enable a holder to purchase security shares, while put options allow traders to sell security. Often, in an options chain, the call options will be listed on the top half of the chain and the put options will appear on the bottom. Across the very top row of the chain is a horizontal list of the month of each security expiration date. The strike or exercise price is listed in the leftmost column of the chain. The strike price is the fixed price at which an investor can sell or purchase the security, depending on whether he or she is conducting a call or a put. The second column lists the ticker symbol of the option, which, like stock symbols, helps the trader figure out the strike and expiration of the option. The next column labeled “Last” indicates the price of the previous trade for the option in question. The column after that shows how much the price of the option changed since the last time the market closed.
The change column is followed by a bid column and an ask column. These show the option’s current bid price and ask price. Together, they make up the “bid/ask” spread. The final two columns are the volume column, which shows the number of option contracts traded in the course of the trading day, and the open interest column which informs a trader of how many open contracts have been in existence since the opening of the option.
An options chain helps a trader determine whether an option is “in the money.” For call options, this means that the market price is larger than the strike price, and vice versa for a put option. Traders who purchase or sell options that are “in the money” are most likely to bring about a profit, which is why the ability to read an option chain is very useful in trading options.
The world of options trading is a risky one that offers the potential for huge returns, but also can result in huge losses. If handled correctly they may bring about great success, but the unfortunate reality is that most traders make foolish mistakes and lose a lot of money. Any potential investor would be wise to learn as much as possible about the market and consider hiring a broker before making investments.
Options Trading Encyclopedia, www.optiontradingpedia.com
CNN Money, www.money.cnn.com