You can see an option chain by opening the accompanying spreadsheet and selecting Option Chain or by visiting the link: Microsoft Option Chain.

An option chain is a listing of the prices of Put and Call options at every strike price for every expiration date.  Strike prices are most commonly in $5 increments, but low strike prices may change by $2.50 and high strike prices may change by $10.  Some heavily traded stocks may have other strike price increments as can be seen in the Microsoft chain.

The chain is divided by Puts and Calls and by Expiration month.  The Expiration day is always the third Friday of the expiration month.  The first column of the Table is the Strike Price of the option and the second column lists the name of the option.  The option names seem at first to be random, but they do have meaning.  The first 3 (and sometimes 2) letters refer to the stock and may or may not be similar or identical to the stock symbol.  The next letter refers to the expiration month (a to l for calls and m to x for puts) and the final letter refers to the strike price.

The next column refers to the last price at which the option was traded and may or may not be the same as the current price.  The next two columns of interest specify the actual prices.  The Bid price is what a buyer of an option is willing to pay and the Ask price is how much a seller of the option wants.  When you buy an option you look at the Ask price and when you sell an option you look at the Bid price.  You can make any offer for the option but it may or may not be filled.  A good strategy is to use a limit price and split the difference between Bid and Ask.  If you are not filled, move the limit in .05 increments.

The price of Microsoft was 27.75 when the option chain was selected and that is one variable that affects the price of an option.  Look at the Call prices and notice that the lower the Strike Price the higher the Premium (a term used for the cost of the option).  That makes sense since the Call option gives you the right to buy the stock at that price.  You would have to pay more to buy the stock at 20 than at 25.  Now look at the Put prices and notice that the higher the Strike Price the higher the Premium.  Again, that makes sense since the Put option gives you the right to sell the stock at that price.  You would have to pay more to sell the stock at 30 than at 25.

A second factor that affects the price of an option is the length of time to expiration.  Compare the option prices at a Strike of 27 for August with the same Strike for October 08, January 09, and January 10.  The price of the option increases as the time to expiration increases.  Again this makes sense as the farther out the Expiration, the more time for the stock to change.  This difference is referred to as the Time Value of an option.  I will be writing more about that in future articles.

I am frequently asked: How do you buy an option?  Who sells it to you?  The answer is very simple.  The mechanics of buying an option is no different from buying a stock.  Just like you do not ask who buys or sells your stock, you do not need to be concerned with who buys or sells your options.

Option Strategies. Is a listing of the various ways to use option.
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