How are Options Quoted – The Option Chain

Like stocks, options are also quoted with bid and ask prices.  The “bid” price is the highest price that a buyer is willing to pay, while the “Ask” price is the lowest price a seller is willing to accept for an options contract.  Let’s take a look at an option chain, method of quoting option prices, for AAPL to clarify this concept – calls options are listed on the left side while put options are on the right.

The option chain above shows a number of strike prices for the month of Dec 09 and Jan 10 and provides the bid/ask for each option.  When you conduct a transaction at the bid/ask price, that is known as a market order.  Whether you buy/sell an option at the bid/ask price, the amount you pay/receive is known as the option premium.

There are a number of expiration months available besides Dec 09 and Jan 10 shown in the option chain, but for simplicity, these were omitted.  **Also, remember that options expire on the 3rd Friday of each month!!  So, the Dec 09 options listed above will expire on the 3rd Friday (Dec 18th, 2009) of the month.

The “strike“ column displays the strike price or the predetermined price at which the option transaction takes place.  So if you bought a  230 call strike for Jan 2010 , you would have the right to buy 100 shares of AAPL at $230 on or before expiration.

**Since options allow control of 100 shares of an underlying, the bid/ask prices quoted must be multiplied by 100 to determine the total debit/credit.  Generally, a trading platform takes care of this and traders only discuss pricing in terms of “option premium”.  For example, the option premium for a 230 call (Jan 10) is $2.30 and it is implied that your trading account will be debited $230.  We will also use “option premium” to discuss pricing from herein.

The option chain above was simplified by omitting columns such as Volume and Open Interest, but these are important factors to know.  The volume displays the number of contracts that have traded for the given strike/option for the day, whereas the open interest provides the number of outstanding contracts open for the given strike/option.