First, let us see what is Option –
Option is a right to buy (sell) some financial instrument in future at certain price.
So the key components are: (Refer my Jargon Wiki for detailed explanation of each term)
– Price of the Option also known as Premium – Bid, Ask, Last Sale
– Underlying Instrument – could be stock, bond, commodity, future, index etc
– Price at expiration known as Strike Price or just Strike
– Expiration Date – contract expiration date
– Option identifier (refer Option Symbology)
– Open Interest
Option markets are different for each underlier. For example, Stock Options market is different from Bond Options etc.
I will breifly explain how Stock option maket data looks like and how to read it. Other markets have pretty much similar structure.
* Identifier – Usually option identifier is unique that represents the Underlier, type of option, expiration etc
* Premium/Price – Price paid to buy the right
* Last Sale – Last Sale Premium/Price
* Bid – Highest bid price
* Ask – Lowest offering price
* Volume – Volume traded so far (contracts)
* Contract Size – Number shares included in the each contract
Some of the key things that we must care as technologists are:
– What underlying product we are dealing with
– What could be the Strike price. For example, interest rate options Strike price couldn’t be like 45, it is interest rate that is usually a small number.
– Contract Size
– Call Vs Put
– Option Price/Premium. Fr eg: if MSFT is trading at $25, premium of option couldn’t be too close to $25 or higher
Having some basic knowledge would help in testing and save some embarrassments.
Hope it helps.
Some Useful Links:
* Stock Options Prices – CBOE