3/23/22, 9:50 PM Chapter 4: Option Price Chart Example

Chapter 4: Option Price Chart Example

Now let's reinforce what you've learned in Chapters 2 and 3. The chart below is similar to those
you've just seen, but it's expanded. It's by no means a complete listing of options available for
each highlighted stock, but there's enough information here to demonstrate everything you've
learned so far in this lesson.

Stock Op
Strike Last Bid Ask Vol Symbol
Series Int

IBM $121.65 9598000

October $115 $6.30 $6.30 $6.60 254 4419 IBM211015C000115000

$120 $3.90 $3.90 $4.10 382 10240 IBM211015C00120000

$125 $2.20 $2.05 $2.35 345 7593 IBM211015C00125000

January $115 $11.00 $10.60 $11.30 314 2117 IBM220121C00115000

$120 $8.50 $8.20 $8.70 401 8589 IBM220121C00120000

$125 $6.00 $6.10 $6.70 144 6010 IBM220121C00125000

MSFT $253.87 3640780

September $255 $0.90 $0.80 $0.95 2654 15507 MSFT210917C00255000

October $255 $3.30 $3.10 $3.40 337 12537 MSFT211015C00255000

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Qualcomm $150.00 144800

January $150.00 $10.50 $10.10 $11.70 31 8218 QCOM220121C00150000

$155.00 $8.90 $8.10 $9.10 72 8173 QCOM220121C00155000

$160.00 $7.50 $1.50 $3.10 0 4262 QCOM220121C00160000

Option Price Chart

Instead of just one stock and its related options, you now see information on three stocks. Can
you name them? They're IBM, MSFT (Microsoft), and Qualcomm. Each stock is listed with its
closing price and number of shares traded for the day. For example, Microsoft stock closed at
$253.87, and 3,640,780 shares changed hands that day. In addition to two more stocks, we've
expanded the number of options shown. Now you can see the IBM options for October and
January, the Microsoft options for September and October, and the January options for
Qualcomm. The option symbols, as in previous charts, are on the far right. The Last, Bid, and Ask
columns have all the option price data. The Vol and Op Int columns show the numbers of option
contracts traded, or volume, and the number of existing contracts, or open interest.

Let's use this chart for all the examples below.

Example 1: What's the Most Heavily Traded Option?

Show
Chart

The option with the highest number of trades is the Microsoft September 255 call option, symbol
MSFT210917C00255000, with a volume of 2,654.

Let us point out some other interesting things about this option. First, it has the greatest open
interest of the options shown. You can see that by comparing its open interest number with the
other numbers in the Op Int column. Second, the spread is low. Remember what spread is? That's
the difference between the bid price and the ask price.

But how did we determine the spread? By taking the ask price of $0.95 and subtracting the bid
price of $0.80, you see that the spread's only $0.15. Notice also the last price paid for this option
was $0.90, which is in between the bid and the ask prices.

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Just by looking at a few numbers, you now know many important facts about this option. And
these facts are essential to your successful future option trading. For instance, you know this is a
heavily traded option. This should give you peace of mind, because if you buy it now and later
decide to sell it, you'll probably find a ready buyer. The fact it has high open interest is a clue that
a lot of people chose to buy this particular option… almost certainly because they thought it had
the greatest profit potential.

The fact the bid and ask prices are close together (in other words, the spread is narrow) is a good
indication many people are bargaining for this option. Knowing the last price is in between the
bid and ask prices tells you the prices are current; they're not left over from last week.

Like a great detective cracking a case based on a few random clues, you've learned all this vital
information from a few scattered numbers. Congratulations! You're on your way to being an
options sleuth. Ready for another case—we mean, example?

Example 2: Which Option Has the Lowest Open

Interest?
Show
Chart

Op Int stands for Open Interest, so by looking down that column, you should have found the IBM
January 115 call option, symbol IBM220121C00115000, showing the lowest open interest. Using
your newfound detective skills, what more can you learn about this option?

Notice that although the open interest is low, the trading volume is 314, which is considered high.
The bid, ask, and last prices tell you there's active trading going on for this option.

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Why, then, is the open interest low for an option that's being actively traded? That may seem
contradictory, but it could also be a clue that people are closing their position in the option in
order to open a position in another option. We'll explain more about opening and closing in a
future lesson; for now, just understand that as people get out of their option positions, the open
interest number goes down. If you'd been following these prices for a couple of weeks, you might
have spotted some kind of trend. For instance, maybe as the IBM220121C00115000 open interest
decreased, the open interest for IBM220121C00120000 increased. That would be a strong
indication traders are bailing out of the IBM January 115 call and getting into the IBM January 120
call. Intriguing, if so.

Example 3: Which Is the Least Traded Option?

Show
Chart

That's relatively easy to spot. Only one option has zero volume: the
Qualcomm January 160 call, symbol QCOM220121C0016000. What more
can you learn about this option, detective? It still has a sizeable open
interest, but there's obviously little trading going on for this option. Look at
the spread between the bid and ask prices. It's a whopping $1.60.
Furthermore, the last price of $7.50 is definitely outside the bid/ask range.

There's another important clue here if you can you catch it. The last price is higher than the current
ask price. What does that tell you? It tells you the price of these options has dropped sharply
since the last trade; there are few buyers out there, and there hasn't been much recent trading.
You'd count yourself lucky if you'd been the person who sold the QCOM220121C0016000 option
for $7.50, wouldn't you?

Example 4: Which Option Is Most Expensive?

Compare the IBM October 115 and the IBM January 115 options. First, notice that both options have
the same underlying stock, IBM, and the same strike price, 115. They differ only by the expiration
month. (The expiration month is the month listed below the stock name and remember, the MM
date part of the option symbol.)

Show
Chart

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You can quickly see that the IBM October 115 call, IBM211015C00115000, last traded at $6.30. The
IBM January 115 call, BM220121C00115000, traded at $11—nearly double the October call for the
same strike price. Now look at the October 115 call and compare it to the October 120 call,
IBM211015C00120000. These two options both have the same underlying stock and the same
expiration month, but different strike prices of 115 and 120. See how this affects their prices?
Notice, too, the October 120 call traded for $3.90, which is much less than the 115 call.

Do you see a pattern here? Look at the prices of other options that share the same strike price but
different expiration dates. Now, do the same option price comparison for options that have the
same expiration date but strike prices that differ. Hey, this is getting interesting, but why do
expiration dates and strike prices have this effect on option prices?

Sorry, we'll save that for Lesson 4, when you'll learn the factors that determine a fair price for any
option. Keep honing your detective skills until then.

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