In this video, we're going to go through reading and options pricing table and help you understand what's involved, what you need to look at, what don't need to look at, or what you don't need to worry about.
And then we're also going to talk about different order types on a very basic level. Here's the deal, broker platforms conveniently display all options pricing data. The contracts, the strikes, the months, everything in an easy to follow options pricing table for investors like us.
Though confusing at first, it's incredible, incredibly easy to follow. Like anything in life, as long as you know what to look for, then you know exactly what to focus on.
Without further ado, let's jump into our Think Or Swim platform, and again this is at the time I'm doing this video, and we're going to be looking at today D.I.A. which is the Dow Jones Industrial E.T.F. Trust.
So right now this is the stock chart of D.I.A., along with implied volatility, and to get to the trade tab, you just have to go to your trade tab in any broker platform. It's usually pretty easy to follow ...
And just type in the top hand section the ticker symbol of the stock that you want to look at. So in this case, we're looking at D.I.A. Now a couple of main things pop up initially and before we get too deep into each of this stuff I want to kind of show you each of these different sections.
First of all, you usually have this option or stock or underlying section. Now, in this case, the D.I.A. underlying section just means the actual stock. For example, right now the last traded price 176, the net change of the day is 34 cents, the bid, the ask, the volume today, the high, the low, et cetera, et cetera.
Now beneath that you'll see something that looks like this. This is going to be your option chain or how you toggle and see different option contracts. Again, different brokers are going to show it differently, but they might call it the option chain, the option pricing table, whatever the case is.
In our case, with Think Or Swim, they call it the option chain, and you can toggle that open to reveal all of the different contract months. This is where we start kind of really getting deep into options pricing table.
We have now all of these different contracts that are available to trade for D.I.A. and you can see that there's actually a combination of weekly contracts, there's also some quarterly contracts, and then the ones without any additional verbiage, those are the monthly contracts.
We have the April monthly, the May monthly, the June Monthly, et cetera. That's how you can read those different contracts. Within each of those different contracts, there's going to be the tag for the contract.
There's going to usually be some indication of how many days are left, and then there's going to be option contract multiplier. Now, in most cases you can pretty much assume first of all, that all option contracts have a 100 multiplier. Now what, that 100 means is that one option contract controls 100 underlying shares of stocks.
Some option contracts are very weird and very non-usual. Might have 1 to 150 or 1 to 200. Mostly, everything that you'll likely to be trading in your lifetime is 1 to 100. You don't really need to worry about that, but that's something that I just want to explain what that is.
Next to that, you are going to see the time left until expiration. This is really helpful, because it tells you how many days are left until expiration. Now these aren't trading days, these are calendar days.
For examples, if we were trading the April monthly contracts, those have 25 days left until expiration. If we were trading the May monthly contracts, those have 60 days left until expiration. This is where we start to develop an idea of how far out we want to trade.
Right now you can see that we have January 2018 contracts that are available and those have 669 days left until expiration. You can run the gamut of how long and how far out you want to trade based on how long you want to be invested.
Most of the trading we do here in Option Alpha centered around 30 days, sometimes we take positions 60 days out, but we'll close them after 10 days or 20 days, depending on if they hit our profit targets.
We don't trade anything longer, then say 80 or 90 days, just as a basis of what we do. We just don't find that you need to trade that far out to generate some income.
The other thing is the option tags themselves. These are a little bit different, we've got more video tutorials on this, but there's basically two styles of tags. One, there's the monthly contracts, and then there are these weekly contracts that are in here that have some additional verbiage.
If you see here, the monthly contract just has the name of the month, April, A.P.R., or just the designation for the name of the month, and then the 16 next to it is for 2016, that's why I'm doing this video right now. Those are the April 2016 contracts.
Expiration for regular monthly contracts is the third Friday of every single month. That's when those expiration dates happen. You can check out our expiration calendar inside the downloads and P.D.F. checklist section of Option Alpha.
Then, the weekly contracts have a little bit of an extra little flair to them, and the weekly contracts have an extra number, hopefully you can see this. If not, enlarge your video, make it HD.
But you can see it says, A.P.R. one. And then this other weekly contract here says A.P.R. two, and it still has the tag for 16, which is 2016, but it has A.P.R. one and A.P.R. two. What that means is that this contract, A.P.R. one expires the first Friday of April.
The A.P.R. two expires the second Friday of April. Notice there's not an A.P.R. three because of the A.P.R. threes, or the third Friday of April is for the monthly contract.
So, there will never be an A.P.R. three for anything, or a May three, or a Feb three. There won't ever be a third weekly contract, because those are always designated by the monthly contracts.
But then you can see that there's A.P.R. four and A.P.R. five, which means that these weekly options expire the fourth Friday and the fifth Friday of April. So that's what that little extra tag means.
Again, it seems complicated on the outside, but it's incredible, incredibly easy if you know exactly what to look for. So now let's do this. First of all, in most cases, you can filter and say, "I only want to look at regular options," "I don't want to look weeklies," or whatever the case is.
So, you filter out anything you don't want to see. So, you don't want to see any of these types of options; you can just filter it and move them. You only want to see expiration dates from X to X. You can see everything that you want to see by using filters. That's one quick little tip.
If we wanted to go into, let's say April options, all we're going to do is just open up April and you can see it just toggles open. Now we've got a lot more information on, exact specific option contracts in pricing for April options. And again, there's just toggling open April.
If you want to get into May, you can see those May contracts open up as well. But for the right not now we'll just look at one particular set of contracts for D.I.A.
Now in this case, right down the middle, this is how this option pricing table is laid out. Right down the middle is going to be the expiration date. Just again to confirm that you're looking at the right contracts. So that's important.
We want to double check that they're always the right contracts that you're opening up. And then right down the middle, you'll see the actual strike price. So these are the strike prices that we're going to be using or looking at for determining what we want to do.
These are the strike prices for April expiration. You've got the 175, 175 and a half, 176, et cetera, as many times as you want to see those different strike prices. Now generally speaking, the pricing table's divided into two sections. On the left hand side you're going to have your call options.
This is usually universally used across most broker platforms. You will always see the call options on the left hand side of the pricing table. On the right hand side of the pricing table, you're going to see the put options.
Again, strike prices are going to be down the middle regardless for everything. On the right-hand side, you're going to see the put options. On the left-hand side, you're going to see the call options.
Now within each of these different categories here, so calls on the left and puts on the right, you're going to have virtually the same columns. You can customize and change these columns, but for the sake of this video, we just made it very simple and basic with exactly what you need to know for this pricing table.
The first thing that you'll see is you'll see bid and ask on both sides. Bid and ask basically just tells you where the market is and how wide the bid and ask is. So, the difference between what people are willing to pay for something and what people are willing to sell it for, that is going to be your bid and ask spread for each individual strike price.
Again, on the strike prices, it's the numbers to the right or to the left of those strike prices that designate the pricing for calls versus puts. So in this case, if I was looking at the 176 call options and I wanted to see the bid and the ask, I would find it here.
If I was looking for the 176 put options and I want to see the bid and the ask, I would find the bid and the ask here. So again, very easy to understand and it makes it ...
Even though there's a lot of numbers, by focusing in on just the really, really important aspects, the brokers did really do a good job of narrowing down and giving you as much information as simply as possible, is really what it comes down to.
Now the other thing that we always put on our pricing tables is the mark. This is kind of the last market price or where things are trading right now. This is helpful because it can basically prevent a little bit of the slippage that might occur from what you usually trade.
We're big fans here of lots of liquidity and that's how we focus on it with mark, volume, and open interest. We determine what things have the most liquidity or not. Now in this case, we're looking at, let's say 176 put options, so we're going to look at the put options.
The bid and the ask spread might be 207 to 211. Again this is trading in real time so these will change, but the actual last price it was traded was 209, which you can see is kind of in between this price.
So, if you offer to buy at 207 when the last traded price was 209, you might not get filled. If you offer to buy at 212, when the last traded price was 209, you might have paid a little bit too much.
So, that's why the bid, and the ask, and the mark is real, really important to see those differences right here on the platform. Again, with the call side you can see the same thing. You've got the bid and the ask here, and then the mark is over there to the left. You can see that this is the last market price and last traded price.
Now in addition to this, we also have volume and open interest. Volume and open interest are really important. Volume shows you how many contracts have been traded today. So, today's volume, how many things are trading.
You can see, for example here, on the call side there's only three contracts that have been traded today. Three new contracts that have been traded at the 175 and a half strike for the April D.I.A. contracts.
That's really not too many, that's not a lot of volume. On the other hand, you can see the 176 strike calls, which are here. So the 176 on the call side. You can see there's been 150 contracts that have been traded at the 176 strike and that's really important.
It shows you ... It looks like the 176 strike prices are a little bit more active and you might get them filled a little bit quicker or better pricing if you go after the 176 versus the 175 and a half.
Now it's also important to note that the open interest are the remaining contracts that are open and available that have not been closed out. So in this case with D.I.A., there have been 150 contracts that have been traded today. 3,746 are still open.
Meaning that there's still a contract out there between two parties. You'll also notice that sometimes there'll be a zero in the open contracts, but they'll be volume and you'll ask yourself, "Well why is it that there is volume?" Meaning we know three people traded these contracts today, but there's a zero here.
There's really two explanations for this. One, is that they could've been all closing orders, meaning those three contract could've closed everything out, meaning buyers and sellers reverse their orders and closed out their positions, meaning there's no open positions out there on either side.
It also could be because, the open interest is a one day lagging number, meaning that open interest is calculated one day after the market trades. So, tomorrow if these three positions were all new positions, that number three would transfer over to the open interest column and it would show that there's three open positions available on the market.
For our purposes, when we look at an options pricing table, we generally like to focus on things that have higher volume and liquidity. Now that's gonna be relative, because higher volume on D.I.A. might look really the low on something else like Apple or Chipotle, but it's relative.
But you'll see on the options pricing table when you start to really dig in to a lot of this stuff, what looks like good liquidity, and good volume, and open interest. Those are how the options pricing table is broken out.
Hopefully that was a really good example, just kind of high level of how the options pricing table works. If you have questions please let me know. We'll obviously dig a little deeper into options pricing and stuff in the next couple of videos.
Before we close out for today, I want to also go through the different kind of general order types that you can place. In this case, we're going to be looking at buying and selling calls and buying and selling puts. Just the basic building blocks of everything that we do here at Option Alpha.
If we wanted to buy, let's say this 176 strike call option. All we have to do is click on the row here, anywhere on the row to highlight. We can right click on here and go over to buy, and then just go over to a single order.
Now you'll start to see all these different complex orders start to populate and we'll go through those in other video tutorials and later on in track one, and track two, and track three.
Right now, we're just going to a single option order. That's going to bring up this order dialog box to go ahead and buy this contract. Now it's going to start to look a little familiar, because now we start to see this option order start to really take shape based on everything that we've talked about previously in track number one.
You can see that the side that we're opening up is a buy side, we're buying to open. We've got one contract. The symbol is D.I.A. The expiration is April 2016. The strike price is 176. It is a call option, versus a put option, and finally the price that we're going, paying right now that's trading live time is 212.
Now that's kind of the basics of the order type or the option contract that we're getting into. This stuff on the right hand side now gets into the different order specifics. All of this stuff you can change and adjust, but now the stuff on the right hand side here, these are the order specifics.
So, how aggressive you want to be in pricing? How long does the order last? Which exchange is it routed to, et cetera. In this case, there's usually only a couple choices for how long the order lasts. I'm going to start here with this box here, which is either a day or G.T.C. order.
A day order means that the order is only good for today's trading session. Meaning that after today's trading session this order no longer becomes relevant and it expires. So it would either gets filled or it expires at the end of the day. In the case of a G.T.C. order, a G.T.C. order means it's good until canceled or good till canceled.
Meaning that this order will continue to work in this market until you cancel it or it gets filled by the market. Now we generally prefer always to use G.T.C. orders for automatic closing orders and for stop loss orders, anything we do where we want a predefined exit.
We use G.T.C. orders to do that for us, to automate the entire trading process. For order entry, we like to do day orders, because we like to know exactly what's we're going to get into or out of in a security for that particular day.
We like use a lot of day orders to get into, we like to know exactly what we're doing and what type of order we're entering the market.
Exchange, you can also route your order to any particular exchanges you want. We always choose best, so whatever the best exchange is the brokers will route it to best, no need to mess with that.
And then within here you have different order types. You have a market order, which we have video tutorials on this as well, but quickly market order means fill me at the next market price.
So when you see the market order in there you see that the price goes away, because it's not that you're getting filled that whatever happens. It's just that the next market price that's quoted you're going to be filled.
You'll also have limit orders, which is what we use 99.9% of the time is limit orders. Limit means limit my price to exactly what I say it is in this box. I can change this box. I can type in a new price.
I can tell the market I only want to get filled if the price goes down to $2, the price is currently at $2.15. I only want it get filled if it goes down to $2, et cetera.
Then there's other things like stop, stop limit, trilling stop limit, market on close, limit the on close, all things we go through in some of the modules that we have here at Option Alpha. The two key ones that we use for sure are limit orders and then the difference between day and G.T.C. orders.
That's really 99.9% of all the trading that we do. We rarely use stop orders. We rarely use market orders, if ever. I don't think I've ever really used a hard fast market order on a consistent basis.
Most of the trading we do here at Option Alpha is around limit orders, and G.T.C., and good till canceled orders, and day orders. So that's how we do a single leg call option.
If we were to buy a put option, we would just highlight the row that we want, right click again, go over to buy, and go down to single, and again now it brings up everything that we want to do.
Same strike price, same expiration date, same symbol, same number of contracts, but now the only thing that changed is the type of contracts. So, a put option versus a call option, and now the price will change as well to reflect the new market price that's there.
All of the same mechanics are basically the same, it's just if you want to buy a put option versus buying a call option. So hopefully this has been helpful to go through. Again, thank you so much checking out these videos here at Option Alpha.
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