How to read Option Specifications?

Posted on August 22nd, 2006 by PokerOption.
Categories: F.A.Q., Option Trading Mathematics / Strategy.

options usually come with four specifications:

1. underlying stock name
2. expiration date
3. striking price
4. call or put

Here is an option position I recently sold and blogged:

Index Option Expire: Oct 20 06

Option Trading Mathematics
We entered an Index Option position today.
1175/1200 - 1375/1400 x2
Max option trading reward : $456 if 1200 - 1375 (83.41%)

1. underlying stock/index name
• not included because we only trade one underlying (S&P 500)
2. expiration date
• This is the October option which expire on Oct 20th
3. striking price
• 1175/1200 - 1375/1400 x2. There are 4 striking prices and the x2 means 2 contracts of each.
4. call or put
• the lower two numbers are put options and the two higher numbers are call options. In this case 1175/1200 are puts options and 1375/1400 are call options.
• additionally 1200 and 1375 were sold. 1200 sold for $4 and 1375 sold for $1.6. What this means is if the S&P 500 index stays between 1200 and 1375 by Oct 20th, we would make $5.6×100 sharesx2 contracts = $1120.
• 1175 and 1400 were bought for protection. This helps limit the maximum option trading risk . We paid $2.6 for the 1175 and $.7 for the 1400 for a total of $3.3×100 shares x2 contracts = $660.
• $1120 - $660 = $460
• ( minus comission and we have our position’s Max option trading reward : $456)

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