A look at all the important option trading terms
Hi everyone. This is Sushant Reddy from Big Blind series. In this tutorial, I will talk about the specifics of option contracts. We are going to use a lot of these terms in our future tutorials and I want to make sure that we get super comfortable with the basics. Some of it might be repetitive but please bear with me on this.
Option Contract
Here’s how a basic options contract is quoted
I have taken this quote from NSE website for ICICI Bank. The quote was an on current date, ie May 03, 2019 at 15:30 hours.
Symbol is ICICIBank — this refers to the underlying asset that would be bought or sold. Note that this can be a stock (eg. RIL, HDFC BANK, ICICI BANK) or an index (NIFTY, BANKNIFTY)
Expiry Date is 30 May 19 — expiry date refers to the date when option holder has a right to exercise the option to buy/sell underlying asset
Option Type is Call — a Call option gives holder right to buy ICICI Bank on expiry date, a Put option gives holder right to sell ICICI Bank on expiry date
Strike is 410— strike price refers to the price at which option holder can buy ICICI Bank on 30 May 19
Premium is 14.85—premium refers to the amount to be paid to buy 1 Option contract on ICICI Bank. Premium is always paid by option buyer to the option seller at the onset of transaction
Option buyers and sellers
Just like any other traded asset, an option transaction gets consummated when an option buyer and option seller agree on a price.
Buying an option is also referred to sometimes as ‘going long’ an option. Selling an option is also referred to sometimes as ‘going short’ an option. Sometimes an option seller is also referred to as an ‘option writer’.
To avoid confusion, I’ve created a simple table that explains the actions of option buyers and sellers.
Option Chain
Option chain refers to a table listing prices of options at different strikes. Here is how a sample option chain for ICICI Bank looks like on NSE website (you can click on this link to check latest option chain table on NSE):
Grey box on top refers to option expiry — notice that all the options listed below have a common expiry date of 30 May 2019.
You will notice three blocks marked in blue, green and red. Box marked in green is a list of all strikes that are currently trading for ICICI Bank. Notice that option strikes in the range of 260–470 are being traded in the market.
Blue box refers to all the call options while Red box refers to all put options traded on ICICI Bank. You will also notice that both call & put boxes have white and yellow sections. While we’ll discuss this in greater detail in future sessions, I’ll quickly introduce the concept of in-the-money and out-of the money options.
A call option whose strike is higher (lower) than current stock price is called an Out-of-the Money (In-the-Money) call option. Similarly a Put option whose strike is lower (higher) than current stock price is called Out-of-the-Money (In-the-Money) put option. In the option chain table shown, out-of-the money options are marked in ‘white’ background and in-the-money options are marked in yellow background.
Since the exchange always contains buyers and sellers, an option buyer will always make a bid with a price and quantity (bid price / bid quantity); similarly, an option seller (also called ‘option writer’) will demand an ask price and quantity (ask price/ ask quantity). LTP refers to the last traded price of a specific option and Volume refers to the total contracts traded on exchange.
Notice that above table has other parameters such as IV, OI and Change in OI. We’ll revisit them in future tutorials; To summarize the article, we’ve looked at how an option contract is quoted, what does buying and selling an option mean and how to read option prices off an ‘option chain’.
As always, hope you guys enjoy these videos. If you have any comments or questions, please ask them in the comment box right below.
