How to Read Option Alerts, the Beginner Edition.

While trading, you’ll have come across wondering what options are, how you can read them, and how you can also trade the same or similar option as someone else.

AAPL 150C 1/1/21 @ 5.00

Let’s use the option shown above as an example. This is an Apple call option contract at a $150 strike expiring on 1/1/21 purchased at $500 per contract.

But, first. What is an Option?

Options are contracts that give you the right but not the obligation to control (buy or sell) 100 shares of stock per contract at a certain strike. These can be executed as long as they are In the Money (ITM) by expiration.

Breaking it Down

In a typical option contract, each alert can be broken down into several parts. Some of these parts are the stock ticker, the strike price (also known as the bet), the direction of the option (call or put), the expiration date, and how much each option costs broken down by the share.

  1. Strike
    • The strike price is the pre-determined price at which the stock’s price must cross in order to execute an option.
    • Call Example: If you hold a call option for AAPL @ 100.00, this gives you the right to control stock if the price of AAPL is above $100.
    • Put Example: If you hold a put for AAPL @ 100.00, this gives you the right to control stock if the price of AAPL is below $100.
  2. Call
    • Buying a call means you are expecting and most importantly, betting the stock price to go up. Selling a call means you are betting the stock price to go down.
  3. Put
    • Buying a put means you are expecting and most importantly, betting the stock price to go down. Selling a put means you are betting the stock price to go up.
  4. Expiry
    • The pre-determined date at which your option expires, meaning they will cease to exist. At which you can either execute, sell, or let it expire (worthless).
    • For example, you own an AAPL 11/27 call for $100 and the date is 11/27. The stock price is $110. You can either execute the call, which allows you to buy 100 shares of stock at $100 dollars ($100.00 x 100 shares = $10,000.00) even though the price of the stock is at $110 or you can sell the option at the premium price to just claim that money.
    • Conversely, if you have the same call, but the price of the stock is at $90, your option will ultimately expire worthless and you lose your investment.
  5. Option Price
    • The cost of the option during the time it was purchased.
    • Every option contract holds a theoretical 100 shares. So if you see an option contract that costs $5 dollars (or as shown in the example above, 5.00), it usually means this option contract will cost $500 dollars because 5 times 100 equals… well 500.

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