A Stock Option Example

by Wes Bridel on April 13, 2011

in Stewardship

Stock Options are simpler to understand than you think and if used properly can lower your risk and increase your returns.  We’re going to our explanation how by looking at several option chains for Microsoft as displayed on the basic Fidelity Option trading platform so that you can have some understanding of how options are displayed.  Of course, every platform will look different.  Due to space, we’re not going to display full option chains, but instead will show you a few examples that will illustrate the things we’ve been discussing. 

On your broker’s site, you can easily see a more full stock option chain by looking for an option that says “Show Option Chain” or something like that after typing in a stock (within the option trading portion of the site).  You must have option trading permission from your broker to even have this stock option available on your website, but there should be a place on the site where this is easily obtained.

Let’s look at the basic information for Microsoft at the particular moment in time (Dec 3, 2010) which we are basing the following option examples upon…

Quote for MSFT MSFT – MICROSOFT CORPORATION

Last

Change

Bid Size

Bid

Ask

Ask Size

High

Low

Volume

90-Day Avg. Vol.

EPS

P/E

27.02 +0.13 1 27.03 27.04 46 27.06 26.78 52,595,937 62,051,606 2.33 11.60

You can see that Microsoft was trading at just over $27.  Below this is the option chain.  We’ll post a few abbreviated versions which will highlight real life examples of the factors discussed above.

Calls for Dec 18 2010.

Last Change Bid Ask Volume Open Int Strike

1.11     +0.05               1.12 1.15 3,241               57,280                         26

0.11     -0.02                0.11 0.12 2,185               23,863                         28

0.01     -0.01                0.01 0.02 1                  9,182                          30

These details for these 3 options are pulled from the option chain for Call Options to be exercised on December 18, 2010.  The four columns on the left tell you about the price these options have been trading at.  The Last Column shows you the last price at which each of these three options changed hands.  The Change shows you whether the price is moving up or down.  The Bid tells you the highest price at which someone has an open order to buy this stock option currently.  The Ask tells you the lowest price at which someone has an open order to sell this option.  If you know you want to trade an option, you’ll often want to place your order in between these two numbers to attract the best price while still giving yourself a high probability of getting filled.

The Volume Column shows you how many of these options trade in a day.  The Open Interest Column shows you how many of these contracts are outstanding (yet to be settled).  The Strike Price tells you which option you are looking at the information for.

The entire set of numbers is displayed by the Expiration Date of the Options.  The information is then displayed in rows in accordance with Strike Prices listed in order (in this case, we used every other strike price (and only three of them) to keep things simple.)

This information is clearly old and is only being shown for educational purposes.  Nothing here should give you the idea that this is a trading recommendation as it is not meant to be.  (also, since this is old information, trading anything here would be impossible.)

This is Pt 3 of a new series on stock options which we’ll be revisiting every few days.  You can find the first two parts at the following links: Pt 1 & Pt 2.  You can check out the series we just finished on professional money management and funds by following these links: Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, & Pt 6.

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