Adding stock options to your portfolio can help you level up your investing game. Learning about options and how they work is a good place to start. That includes knowing how to read a stock option quote.
Stock option quotes have five key parts. This quick and easy guide to reading them can help.
What is a stock option quote?
A stock option quote tells you what an option is worth at any given time if you were to exercise it. Options give you the right to buy or sell an underlying asset at a set price during a specific time frame or on a specific date. Exercising the option just means you exercise your right to buy or sell.
Stock option quotes can be displayed on a ticker, just like regular stock quotes. When you're reading quotes for options, it's important to note that there may be a lag of 10 to 20 minutes, as tickers don't always display quotes in real-time.
Example of a stock option
Before we break down how to read a stock option quote, it helps to know a little more about how options work.
An option is a contract that gives you the right to buy or sell an underlying security. There are two main types of options: Call and put. A call option gives you the right to buy, while a put option gives you the right to sell.
Let’s say you have a call option that would allow you to buy 100 shares of XYZ stock at $30 per share wit ha $3 premium cost per share. The stock's price is currently at $27, but you think it's going to go up to $41.
Your hunch turns out to be correct, and the stock's price hits $41 per share. You decide to exercise the call option and buy 100 shares at $30 — once you take the $3 premium into account, thats a return of $8 per share.
Put options work in reverse. The goal is to sell options at a higher price than what they're trading for. So, you might buy a put option for the same 100 shares of stock, if you believe the price is going to move from $27 to $17. If that happens, you could exercise the option and collect a $10 profit per share (minus the premium).
Trading options is about making educated guesses about which way the market will move. Knowing how options pricing is determined and understanding how to read a stock option quote is essential when deciding which options to exercise.
The 5 parts of a stock options quote
When it comes to trading options, it’s helpful to be familiar with the various options trading terms. A stock option quote consists of these five elements:
The stock symbol represents the underlying security the options contract is written for. When reading a stock option quote, the stock symbol is at the beginning of the quote and typically consists of several capital letters, such as COST (Costco), DIS (Disney) or ALLY (Ally Financial).
The expiration date is the date at which an options contract is set to expire, and it follows the ticker symbol. It's also the date that determines your deadline to exercise the option. You have until this date to exercise the option. If you miss that deadline or decide not to exercise the option, then it expires worthless.
The strike price is the price at which the option contract is exercised. So, if a call option has a strike price of $20, you'd be able to buy the underlying security for $20 per share. The strike price is listed after the expiration date.
Next, you'll see the type. In a stock option quote, the type simply refers to what type of option you're dealing with. If it's a call option, then you'll see the word "Call" after the strike price. If it's a put option, then you'll see "Put" instead.
At the very end of a stock option quote, you'll see the premium. This is a dollar amount that represents how much you pay for the option.
The option premium can change over time, depending on the price of the underlying asset and when the option is set to expire. Knowing the premium is important since it can tell you how much value you'll get from exercising the option (the difference between the stock price you paid and the stock price at expiration, minus the premium). It's also the amount you stand to lose if the option expires worthless.
Expanding your investment horizons with options
Options trading isn't right for every investor and comes with risks to consider, but it's something you might take a closer look at if you're looking for new ways to diversify your portfolio. Knowing how to read an options quote is an important step in taking your investing to the next level.