Stock Option Quotes

Things are not always as they seem in the financial markets. Some of the most confusing numbers out there are stock options quotes, which appear to be a simple number, yet they represent something greater than the number itself.

Puts and Calls, Defined

An option, either call options or put options, is a contract to buy (call) or sell (put) 100 shares of the underlying stock associated with it. The price of that contracted transaction (which is not the market price) is called the strike price.

With a call option, you can buy 100 shares of the stock at an agreed upon price, the strike price, within a fixed timeframe, or term, no matter what the stock is selling for in the market. If the strike price is $15 and the stock is actually selling for, say, $29, you'll only pay $15 per share for it when the contract is called.

Which, by the way, only happens at the very end of the term. In that example, the option itself would be priced to reflect that same profit margin (maybe more if there is still some time left on the term), so a trader would opt to sell the option contract itself rather than call the stock at the strike price. The only time that happens is at the very end of the contract term.

Put options work the same way, only in reverse: when you buy a put contract, you are buying the right to sell someone 100 shares of stock at a given price (the strike price). This is very much like short selling, in that you will profit if the market price of the stock goes down.

Understanding Stock Options Quotes

Here's what you need to know, first and foremost, about a stock option quote: it reads as am option price per share, but the contract is for 100 shares. So you need to multiply the quoted price by 100 to arrive at the price for the entire contract.

Let's say ABC company is selling at $22 per share in the market. There may be call or put options trading at strike prices of $15, $20 and $25, possibly others. The prices of these contracts directly relate to the price of ABC stock, because the option for a $15 call is already worth a minimum of $7 each, while the option at the $25 strike isn't even in the money, so it might sell for $1 or even less.

In each case, however, the actual price of the contract is 100 times the amount quoted. So, in the above example, the $15 option would be $700 or more, and the $25 strike option would be $100 or possibly less.

Doing the math is critical, and it begins by multiplying by 100.