Home > Options Trading > Reading Option Prices
Article By Rick Thachuk
World Link Futures

Many traders often are urged to limit their initial trading activity to the purchase of options - buying a call option if prices are expected to rise and buying a put option if prices are expected to fall. Options have the primary advantage of limiting downside risk: For any option that is purchased, the most that can be lost is the premium (or cost) of the option plus commission and other transaction fees. However, when it comes to putting this strategy into practice, many become frustrated in their attempts to translate the string of numbers that they might download from the Internet into a sensible option price.

Generally, option prices are quoted in ticks or minimum price fluctuations. The dollar value of a tick can vary from market to market and is described in the contract specifications for that market. This, in turn, is set by the exchange on which the contract trades. At first, you will have to study the tick values, but in time you will know the common ones by memory. Let's look at some typical option prices as examples.

Gold Options:
One tick in the gold options market is 10¢ per ounce and has a value of $10. With June gold futures at $283.50 per ounce, for example, the June gold call option struck at 285 may be trading at $4.10 per ounce, or 41 ticks, which is equal to $410.

Bond Options:
One tick in the bond options market is 1/64 of a point and has a value of $15.625. With June bonds futures at 96-29, for example, the June bond call option struck at 96 may be trading at 1-38 or 102 ticks equal to $1,593.75. (Bond option prices are expressed in 64ths of a point, so 1-38 means 1 + 38/64 = 102/64.)

Sugar Options:
One tick in the sugar options market is 1¢ per lb. and has a value of $11.20. With July sugar futures at 6.52¢ per lb., for example, the July sugar call option struck at 650 may be trading at 36 ticks, which is equal to $403.20.

Cocoa Options:
One tick in the cocoa options markets is $1 per ton and has a value of $10. With July cocoa futures at 885, for example, the July cocoa call option struck at 850 may be trading at 67 ticks, which is equal to $670.

When pulling option prices from the Internet that originate from the exchanges themselves, a decimal may or may not be shown in the option price. This is a feature of the price reporting software of the exchanges, and it will make interpreting the price a little more difficult. However, if you know what price to expect, then it won't present a problem. In most cases, you can disregard any decimal that may exist and consider the number to be in ticks. Multiply this number by the tick value to calculate the option price.

When calculating option prices, use the following as approximate guidelines for checking your answer:

1. Call options become less expensive the higher the strike price.

2. Put options become more expensive the higher the strike price.

3. Call and put options become more expensive the longer the time to expiration.

4. For most markets (not including the equity index markets), the value of an at-the-money call or put option with one month to expiration usually falls between $400 and $1,500. If your calculation produces a price far outside of this range, you may have an error.

If you have a trading account, or even a paper trading account, you may be able to contact your broker to confirm your calculation of an option's price. Doing so is advisable, especially the first few times. After a little practice, you should be able to read option prices quickly and easily.

Article Reprinted with the permission of Rick Thachuk, of World Link Futures
Rick has been involved in various aspects of the futures and options markets, including positions as an economist and derivatives market analyst at the Bank of Canada and Finex. In 1996, he founded World Link Futures Inc., an educational Commodity Trading Advisor serving the beginning trader.

DISCLAIMER:  Futures Trading involves a huge risk of financial loss!  FuturesKnowledge.com is a traders research and resource site - and is not meant to be used as a guide for trading.  Due to the large risk involved - we highly recommend that you consult with a number of different resources before attempting to invest in the futures, commodities, options, or any other market we report on.

Copyright © FuturesKnowledge, 2006.   All rights reserved.