Describing an option

Jun 21 2010

Describing an Option

When you buy or sell an option, it is important to be able to describe that option so there is no doubt as to which option you want to trade.  We already know that any stock - perhaps AAPL or GOOG, has many different options that trade at the same time.  Half are calls and the other half are puts.  There are a number of strike prices and at least four different expiration months. How do we tell one option from another?

Fortunately, the method is simple.  There are four essential pieces of information that describe any option.  Due to recent changes, it's possible that your broker may use something slightly different, but the difference truly is small.
  • Stock symbol. You must identify the stock (underlying asset) whose options you want to trade
  • Option type.  Calls or Puts
  • Strike price: The price at which the call owner has the right to buy, or the put owner has the right to sell, 100 shares
  • Expiration date:The date, after which, the option has ceased to exist.  At that time, the option is worthless
SPY Dec 109 call
An option that gives its owner the right to buy 100 shares of SPY @ $109 per share at any time before the option expires in December.  That expiration date is Saturday, following the 3rd Friday of the specified month, December.

GOOG Jul 510 put
An option that gives its owner the right to sell 100 shares of GOOG @ $510 per share at any time before the option expires in July.  Once again, that date is Saturday, following the 3rd Friday of July.

Any time you buy a specific option, you can always exit your position by selling the same option.  The reason this works is because options are fungible.  That means all options of the same series (SPY Dec 109 call is one series;  SPY Dec 110 call is another series) are identical.  Thus, if you buy such an option you can sell it.  There is no need to seek the person who sold that option to you.  You can sell it to anyone who wants to buy that option.

Similarly, if you sell first, you can close the position by buying the same option in the marketplace. This may seem obvious and trivial, but before options were first traded on an exchange (1973), each option was a separate entity.  That made it very difficult to close a trade.

Mark D Wolfinger

Expiring Monthly: The Option Traders Journal