Stock Option Symbols
For those of you that have no idea what a stock option is, you’re in the right place. As you go deeper into the various alternative financial instruments the market has to offer, the first one you need to understand is stock options.
To put it in basic terms: a stock option gives the holder the “option” to buy or sell a stock at a specific price on or before a specific date.
Even if you’ve been trading stocks for any length of time, you’ve probably begun to realize that the investment world is a complex place. The market is full of unusual financial instruments that allow traders to squeeze every last ounce of value from the stock market’s daily fluctuations.
In this article, we’ll break down what options are, how to interpret and lookup option symbols, and briefly explain how options trading can fit into your overall investment and wealth management strategy.
Stock Options vs. Stock Shares
First, we need to understand the difference between a stock share and a stock option. While the two financial instruments may seem similar at a glance – and are indeed connected – they’re actually very different.
What Is a Stock Share?
This should be familiar territory for most people, so it’s a good place to start. A stock (or equity or security) represents fractional ownership of a company. When you buy a stock in a public company, you become a partial owner of the company that issued it.
The key thing to remember in the context of this article is that stocks have real value that is directly related to the company. If you own a share of Walmart stock, you own a (very) tiny fraction of every single Walmart store in the world.
What is a Derivative?
Before we can talk about options, we need to understand derivatives. A derivative is a type of financial instrument that “derives” value from some underlying asset. The asset could be just about anything, but to keep things simple, we’re focusing on stocks.
The derivative itself has no intrinsic value. When you invest in a derivative, there’s no building somewhere that you now become part owner of. Without the existence of the underlying asset, the derivative is just data and paperwork – no value.
As an analogy, think about a baseball game. The players, the stadium, the crowd, the concessions – these are all real things with real value. A derivative might be betting on how many people are in the stadium on a given day. Without the crowd, there’s nothing to bet on.
What is a Stock Option?
In short, a stock option gives the holder the “option” to buy or sell a stock at a specific price on or before a specific date. In exchange, the seller of the option collects a premium for their experience and trouble.
What’s happening here is that options allow traders to hedge their portfolios by betting on what might happen in the future. These bets cost money, but the hope is the gains (or losses avoided) outweigh the cost.
What Does This Mean?
Let’s say I think stock ABC is going up, but I’m not sure enough that I’m willing to invest in a bunch of shares right now.
So instead, I pay for the “option” to buy it in the future (at the current price). If it does go up, I have the right to buy the stock at the lower price and receive instant gains. If it goes down, I only lost the premium I paid to buy the option. It’s a slightly less-lucrative way to take advantage of future gains.
While this is just one example, there are countless strategies traders can employ to make (or avoid losing) money from options. Generally, traders use options as a way to hedge their forecasts, protect gains, and minimize losses.
Stocks and Options Compared
Here is a simple chart showing you the differences between stocks and options:
|Good for||Beginning investors|
Limited cash flow
How to Lookup an Option Symbol
Now that we know what an option symbol looks like, we can use that knowledge to find and interpret any option symbol we want. We will show how you can easily track down an option through Yahoo Finance, as well as easily find options for any stock you are tracking in your StockMarketEye watchlist.
For this example, we’ll use options for Tesla (TSLA), the electric car company.
- Head over to the Yahoo Finance page. This is where you will enter the stock symbol you want to see a list of options for. Simply enter TSLA and hit enter to look up the stock information.
- Once you are looking at the TSLA stock information, you can easily find the complete list of options on the main toolbar. Click on the header that says Options.
- A new page will open showing you all of the options available for TSLA. Calls are listed first and then puts down below. Options currently in the money are highlighted in blue. By default, the screen shows the options expiring soonest, but you can see future options by choosing a date from the dropdown menu.
- For this example, we’ll choose the call option expiring on February 3, 2023, at a strike price of $125.00. Scroll down until you find the symbol for this option, which is TSLA230203C00125000. Highlight the symbol, right-click, and choose Copy.
You can then add this option ticker to your preferred investment-tracking software or use it for investment purposes.
Easily Track Option Symbols With StockMarketEye
Now that you have found and copied the option ticker symbol that you want to invest in and want to be able to track its specific performance. You can easily add and track options through StockMarketEye in two simple steps!
- Open your StockMarketEye software, and click on any Watchlist. You can easily create a new watchlist one if you want to track options performance separately. Click on Add.
- The Watchlist Symbol Details box will open. In the Ticker Symbol text box, Right-Click, and choose Paste (or use your quick paste shortcut). The option symbol should appear in the dropdown menu. Choose it, and click Add.
StockMarketEye is now tracking the option! You can see the TSLA February 3, 2023 call option at a strike price of $125.00 in your watchlist. Feel free to add as many options as you want in the same way.
Stock Options Explained
Now that we know how options differ from stocks, we can look at options in more detail.
Options trading began back in 1973, with most options trading in the U.S. occurring at the Chicago Board of Options Exchange (CBOE). It is the largest stock options trading market in the world. In contrast, most stocks are traded at various exchanges in New York.
What are the Types of Stock Options You Can Find?
The two main types of options are calls and puts, which are basically opposites of each other. The key thing to remember here is that calls are for buying, and puts are for selling.
Call options give the holder the right to buy a specific number of stock shares at or before a specific date and at or above a specific price. In other words, you buy a call option because you think the underlying stock will go up in value.
Put options are the opposite of call options and give the holder the right to sell a stock at or before a specific date and at or below a specific price. In other words, you buy a put option because you think the underlying stock will go down in value.
What are Contracts?
With stocks, you can buy whatever specific number you want or can afford. Options work a little differently as you can’t buy or sell an option on an individual stock. Instead, options are bought and sold in bundles called contracts.
Typically, a contract is made up of 100 shares of stock. If you want to buy the call option for 500 shares of stock ABC, you have to buy 5 option contracts for that stock. If you want to buy call options for 552 shares of ABC, you need to choose either 5 or 6 contracts.
What’s the Strike Price?
Every options contract has a strike price, which is the threshold price that activates the contract. If the stock never reaches the strike price, the option simply expires.
- When the strike price has been reached, the option is said to be “in the money.”
- When the strike price hasn’t been reached yet, the option is “out of the money.”
Do Options Expire?
Every option contract also has an expiration date, which is the last day that the option contract can be executed. It’s important to note that the expiration date is independent of the date you bought the option. The expiration dates are set according to a predetermined schedule.
If the option expires in the money, that means the holder has the right (but not the obligation) to execute the option. If the option expires out of the money, then nothing happens and the writer simply gets to keep the premium.
Reading Stock Option Symbols
Now that we have a basic idea of what stock options are, we can look into stock option symbols and how to track them.
Until recently, stock options symbols were complicated to decipher. Fortunately for traders, the Options Symbology Initiative (OSI) succeeded in redesigning the stock option symbol system in 2010. Now, all stock options follow a standardized and intuitive 21-character protocol.
How to Read an Option Symbol
A standard option symbol is composed of four parts. To help make sense of it, let’s consider an example. We have a call option contract for stock ABC at a strike price of $20.50 that expires on January 20, 2023. The option symbol would look like this:
While that might look like something your cat typed when she walked over your keyboard, it’s actually a logical system. Let’s break it down.
1. Root Symbol
The first part of the option symbol is the root symbol, which will match the code for the underlying stock the option derives value from. The root symbol will always be three or four characters following normal stock naming conventions, making it easy to track down all options available for a particular stock.
2. Expiration Date
As every option has an expiration date, that information is also coded into the symbol. Specifically, the symbol uses a six-digit date code in a YYMMDD (year, month, day) format.
As our example expires on January 20, 2023, our symbol includes the date code 230120.
3. Option Type
The third part of the symbol indicates the option type with either a “C” for calls or a “P” for puts. Our example is a call option, so we have a “C” following the date code. Pretty simple.
4. Strike Price
The final part of the symbol indicates the strike price using an eight-digit code. As you can’t have a decimal place on a ticker symbol, the code simply multiplies the strike price by 1000.
The strike price for our example is $20.50, which would look like this 00020.500 in an eight-digit format, then multiply by 1000 to get 00020500, which is the format required for the symbol.
Basically, they needed a format that allowed for very large numbers and fractional cents. While these are rarely used, if you’re developing a system to stand the test of time, it’s important to account for every possible variation, no matter how unlikely.
Remember, options trading is not for beginners. Options trading can be extremely lucrative, but like many other financial instruments, it’s a quick way to zero out your accounts if you don’t know what you’re doing.
Gain Knowledge and Experience FIRST
Make sure you do your homework before you begin! If you’re just starting out, we recommend forgetting about options for a while and instead setting up a solid, long-term investment plan.
Once you have a good idea of how the market works and have some trades under your belt, you can look into trying to make some extra money by either buying or selling options.
Covered Call Strategy
With that said, the covered call strategy is the safest and most basic approach to options trading, and the one most suitable for traders holding long stock positions. In short, it’s a way to make extra money on stocks you plan to hold long-term anyway.
With a covered call, you write an option for stock that you own. If the option closes in the money, you lose the stock at the strike price. If the option closes out of the money, you keep your stock and the premium. You can continue this approach monthly as a source of cash flow (assuming the stock doesn’t sell).
The primary risk is that you might miss out on potential gains from the stock. In any case, proceed with caution!
Basic Options Understanding
We hope to have a better understanding of what stock options are, how to read and look up option symbols, and how options can fit into a broader investment and trading strategy. While certainly not for beginners, it’s important to understand what the options market is and how it differs from the stock market – at least so you know what everyone is talking about!
If you are investing long term, or you want to try your hand at options trading, you need a trusted information system to keep you up to date on how the market is moving.
Our StockMarketEye software gives you accurate, real-time information so you can always know what’s going on with your portfolio.
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Stock Options & Symbols FAQ
As with any transaction, you need a buyer and a seller. In the case of options, the trader selling the option is called the writer, and the trader buying the option is called the holder.
As with stocks, these traders are not dealing directly (although that can happen). Instead, options are bought and sold on the open market just like stocks.
In exchange for an option, the holder pays the writer a premium, which is the cost of buying an option. The value of the premium depends on several factors but generally reflects the value of the underlying asset, the time left until the option expires, and how close the stock is to the strike price.
Basically, the more unlikely the contract is to execute, the higher the value.
Additionally, both the writer and the holder pay fees as they would for any market transaction. These vary depending on which brokerage the trader uses.
No, but they are closely connected because options derive their value from stocks. Stock options are equity derivatives.
In practice, both financial instruments can play an important role in a strong portfolio. Typically, options are used to hedge bets and protect gains in existing stock positions, so usually, a trader is using options in conjunction with stocks as part of an overall investing strategy.
As options are a type of contract, exercising the option means that the contract holder has decided to execute the terms of the contract.
The Option Symbology Initiative (OSI) was started by the Options Clearing Corporation (OCC), which oversees options trading. The OSI established new rules for option symbols coding that replaced the older system that was difficult to use.
It varies considerably between stocks. Large blue-chip companies might have an option limit of 250,000 of one type (put or call) of option for one trader, while smaller companies might have a limit of 2000. It will always depend on the company.
Like most financial instruments available in the modern market, option prices update continuously, often many times per second.
Yes. The short answer is that gains earned from premiums and options trading incur capital gains taxes.
The long answer is that options and derivatives are subject to complex capital gains rules, which depend on how long you held the position, whether you held multiple options on the same stock and other more specific situations.