What Are Option Quotes
Option quotes are contracts in which the seller gives the buyer the right to buy or sell a particular number of shares at a fixed price and at a set time period. These options can be generally seen quoted in the financial press. All the quotes have the same general information although there maybe some differences on how they are prepared. This can be explained further with the help of an example. Generally an option quote looks like this -PQR 24/10/2014 30 Call’. Now this quote can be easily translated by reading from left to right.
The PQR stated in the quote is the underlying security. The value of the quote can be derived from this. This is the name of the security that the investor has the right to either sell or buy according to the terms listed in the contract.
The date 24/10/2014 i.e. October 24, 2014 is the expiration date of the contract. All the options have fixed expiry date. All have a set of four expiration dates whether they are calls or puts, or the same underlying security (which are considered to be of the same class). The four expiration dates of the same class is known as options cycle. One is February, May, August and November; the other is January, April, July and October and the last cycle is March, June, September and December. Normally the options expire on the Saturday following the third Friday of the specified month. It means that you will have to trade the option by the third Friday. There are some exceptions to this that do exist.
The person who has the option quote has the right to either buy or sell the underlying stock till the fixed time expires. That depends though on whether the option is a put or a call. Put is the option that grants the right to sell the underlying stock and is the opposite of call. Call is the option that gives the holder the right to buy the underlying stock. The writers of the option can terminate their side of the contract before the option expires by buying the contract.
The number 30 is the strike or the exercise price. In the case of call 30 is actually 30$ i.e. the sum of money at which the stock was bought by the buyer from the writer. In the case of put the 30$ is the sum of money at which the stock is sold to the writer. The buyer is guaranteed a sum of 30$ or a share from PQR if he/she exercises the option, regardless of how the price of PQR may rise before the expiration of the contract.
The last is call that is already explained above and is a class of options. They are two classes of options, one is put and the other is call.
These options are the provide flexibility to the individual investor in any investment situation one might face. This is not just limited to selling and buying or staying out of the market.
There are many advantages of options:
- Your stocks can protected from a decline in price of the market
- Increase in income against the recent stock holdings
- Even at a lower price you can buy stock
- Even when you don’t know which prices will move you can position yourself for a big market move.