I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Wednesday, May 30, 2007

My Online Stock Option Brokers (Part 1)

In the previous post, I pointed out some factors you should consider when you’re choosing online broker for you.
To help you find some more info for consideration, I’ll share with you here what I know about my own brokers. I personally use OptionsXpress (OX) and Interactive Brokers (IB). Hope the following info can be quite helpful.

OptionsXpress (OX):

  • Good for beginners. The system guides you step-by-step what you need to do when you’re placing a trade.

  • Nice charts. They provide real-time streaming chart (powered by Prophet.Net) and real-time streaming quotes & option chain for free. I like their charts. It’s clean and easy to use (e.g. apply indicators / studies). You can use the charts once you apply to open an account with them.

  • They have a lot of great tools like Options Pricer, Historic vs. Implied Volatility Charts, Strategy Scan, Trade Calculator, Screener, and many others. I personally like to use their Options Pricer and Historic vs Implied Volatility Charts.

  • OX also allows you to do virtual trading (paper trading) even before you fund the account yet. So, you can fund the account when you are ready for real trading.

  • Minimum initial deposit to open an account: No minimum deposit is required to open an account, but the account must have enough buying power to pay for a trade before it is placed. And for margin account, a USD 2,000 minimum is required to maintain a margin account. (Check out here).

  • Fee and Charges for Option Transaction: USD 1.50 / contract.
    Minimum commission charges per order is USD 14.95.
    Hence, even though you only buy 1 contract, they will charge you USD 14.95. And when you sell to close your position, they will charge you another USD 14.95.
    But if you’re an active option trader, they can charge you less, i.e. USD 1.25 / contract with minimum commission charges per trade of USD 12.95.
    For more details, you can check out here.

  • OX does not charge any monthly subscription fee or minimum charges. There are no charges when you make any modification / cancellation for your order as well. The only charges you have to pay is the commission charges when your order is filled.

Continue to "Part 2".

Monday, May 28, 2007

List of Some Online Stock Option Brokers

Here is the list of some online stock option brokers. Hope this can help you doing the research. :)
(Clicking on the following links will bring you directly to the options info page).

* Interactive Brokers
* OptionsXpress
* Thinkorswim
* Scottrade
* TD Ameritrade
* E*Trade Financial
* Schwab
* Fidelity
* TradeStation
* Trade King
* Trading Direct
* MB Trading
* Zecco
* OptionsHouse
* TradeMonster

I’m sure this list is not complete. Please feel free to inform me if you know other online options brokers that are not listed above. I will add it in the list. Thanks. :)

Update 1 Jun 07:
Steven of Value Blog Review has done a great job. He did a research and made comparisons of option trades’ prices for contracts in various sizes (1 contract, 10 contracts, and 50 contracts) for various discount online stock option brokers. Here is his post: Discount Online Option Stock Brokers. Very informative. I also added MB Trading and Zecco in the above list based on his info.

Related Posts:
* My Online Stock Option Brokers – Sharing My Experiences
* Should You Do Virtual / Paper Trading?
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)

Friday, May 25, 2007

How To Choose An Online Stock Option Brokers

To start trading options, you will need to find an online brokers with option trading facility and open an account with them. Online brokers usually offer relatively lower commission charges, so it’s good for keeping the trading cost low. High commission charges can slowly eat up your capital without you realizing it.

There are many online option trading brokers out there. Finding the right online broker to meet your needs or requirements could be a quite difficult and daunting task.
Basically, there are some factors you will need to consider:

  • Commission / other charges.

  • Minimum initial deposit to open an account.

  • Website performance (e.g. website’s loading speed especially during peak hours, whether the order placement procedure is easy and not complicated or confusing so that you won’t be prone to making mistakes, system reliability).

  • Features / tools (e.g. live streaming charts / quotes, analysis tools, etc.).

  • Ability to get National Best Bid and Offer (NBBO): The broker is able to get the best available ask price when a customer buys a security and the best available bid price when a customer sells a security. That means the customer’ order has to be exposed to the 6 options exchanges to get the best available price at that moment.

  • Customer service: Whether there is customer service which you can contact immediately for assistance in case you encounter problems with your website during trading hours (e.g. via chatting room with the customer service).

  • Contact Alternative: Whether you reach them by other means than internet, such as phone or fax, in case of emergency.

Here are some articles about choosing online brokers I came across if you’re interested to read further:

* How to Choose an Online Stock Broker

* Choosing An Online Stock Broker

For those who have had some experiences using certain online option brokers’ services, it’ll be great if you could share your experience here in the comments. This info would be very helpful for others who are considering and choosing an online broker. :)

Tuesday, May 22, 2007

OPTION PRICING: How Is Option Priced? (Part 2)

In Part 1, we know that there are 6 factors that affect option's price: option’s strike price, stock price, time to expiration, implied volatility, interest rate, and dividend.

Nevertheless, the impact of interest rate and dividend are often considered negligible as compared to the other factors. Most of the time, for each level of strike price, an option’s price will move due to the movement of underlying stock price, volatility and time.

The Black-Scholes formula can be used to calculate the theoretical value of an option based on the above factors.

What is the use of knowing an option’s theoretical value? By knowing the option’s theoretical value, option traders can compare the prevailing option price in the exchange against this theoretical value to determine if a particular option contract is over or under valued, hence helping them in their option trading decision.

Options Calculator / Pricer is normally used to help compute the theoretical value of option price.


Since option’s buyers (long position) will profit when the option price rises after they buy (Buy Low, Sell High), whereas the seller (short position) will profit when the option price falls after they sell (Sell High, Buy Low), the impact of the above factors will also be different.

The following table shows how the major factors (stock price, time to expiration, implied volatility) affect an option’s position.


Increase in Implied Volatility (IV) would increase option’s price (both calls & puts), assuming other factors unchanged. Hence, this will be favorable for option buyers who will gain if the option price increases (buy low, sell high), but unfavorable for option sellers that will profit if the option price drops (sell high, buy low).

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* FREE Trading Educational Videos You Should Not Miss

Saturday, May 19, 2007

OPTION PRICING: How Is Option Priced? (Part 1)

Option price does not always move in conjunction with the price of the underlying stock. As such, it is important to understand what factors contribute to the movement in the option price, and what effect they have.
There are 6 factors that affect option price:

Strike price determines whether an option is In-The-Money, At-The-Money, and Out-Of-The-Money.
The more deeply In-The-Money (ITM), the higher the option price will be, as it carries more intrinsic value.
The further an options is Out-Of-The-Money (OTM), the lower the option price will be.

This factor has opposite impact on call and put (assuming all other factors kept constant):
When stock price increase, Call premium will increase and Put premium would decrease.
When stock price decrease, Call premium will decrease and Put premium would increase.

This factor affects the Time Value component of an option price. All other things being equal, an option with more days to expiration will have more Time Value component than an option with fewer days to expiration.
In general, for both Calls & Puts, the Time Value component of an option price decreases or “erodes” as expiration is nearing (often called “Time Decay”). And the Time Value component would decrease at an accelerating rate as it is getting closer to expiration, particularly for At-The-Money (ATM) option.
Due to time decay effect, even though a stock price, say, just remains constant till expiration, an Out-Of-The-Money (OTM) option price which contains only time value will decrease over time and then expire worthless. Therefore, time is the enemy of options buyers, but a friend for options sellers.

Volatility is a measure of risk / uncertainty of the underlying stock price of an option. It reflects the tendency of the underlying stock price of an option to fluctuate either up or down. Volatility can only suggest the magnitude to the fluctuation, not the direction of the movement of the price.
Implied Volatility (IV) here is an estimate of future volatility. Since it is only an estimate, it is the most subjective and probably the most difficult factor to quantify. Nevertheless, IV can have a significant impact on the time value component of an option's premium.
Higher Implied Volatility reflects a greater expected fluctuation (in either direction) of the underlying stock price, and as such it is more likely that the underlying stock will move in your favor.
As a result, the higher the Implied Volatility of the underlying stock, the more expensive its options (both Calls & Puts) will be, because there is a greater possibility that the options will end up in your favor profitably.

The impact of interest rate on option’s price has something to do with the “carrying cost” of stocks. When you are bullish on a certain stock, it is much cheaper to buy Call option than the stock itself. The interest cost should you buy the stocks is built into the Call option’s value.
In this case, all other things kept constant, an increase in interest rates will lead to an increase in Call premiums and a decrease in Put premiums.
However, in reality, all other things rarely remain constant. An increase in interest rates will generally result in a drop in stock prices, and this impact would often overwhelm the effect of interest rate on option price. Therefore, the impact of interest rate on option’s price is not certain, depending on the combined effects of the change in stock price (due to interest rate changes) and the “carrying cost” effect.

A stock price is expected to drop by the amount of the dividend on the ex-dividend date. Hence, high cash dividends imply lower call premiums and higher put premiums.

Continue to Part 2

Wednesday, May 16, 2007

Option Chain

Option Chain is a list of option prices of a particular underlying stock for various strike prices, expiration dates, and option types (calls or puts). This is where option traders get the current market price of an option during trading hours. The prices in the Option Chain will change throughout the trading day based on the stock price movement, volatility and time.

A sample of option chain can be seen below.

Picture courtesy of Optionsxpress.

  • Option Expiration Month: The months on top of the table.

  • Strike Price: The prices at the center (vertical).

  • Calls are at the left of the Strike Price, and Puts are at the right of the Strike Price.

  • Ask Price: The price when you buy an option (i.e. the price where the market makers are willing to sell).

  • Bid Price: The price when you sell an option (i.e. the price where the market makers are willing to buy).

  • Last Price: The last traded price.

  • Volume: The number of contracts traded for that particular option during the trading day.

  • Open Interest: The total number of option contracts that are still open for that particular option.

  • Symbol: A unique symbol assigned to that particular option of a certain underlying stock with certain strike price & expiration month.
  • You can determine whether a certain option is In-The-Money (ITM) or Out-Of-The-Money (OTM) by comparing it with the current market price. In this example, the current market price is available just below the word “Strike Price”.

  • Some Option Chain may differentiate between ITM or OTM options by using different color. In this example, ITM options are shaded in yellow, while OTM options are in white.

  • For Call options, ITM options (shaded in yellow) are at the upper left side of the table. As you can see, the lower the Strike Price (the more ITM the call options), the more expensive the call option price will be. On the other hand, OTM options (in white) are at the lower left side of the table. The higher the Strike Price (the more OTM the call options), the cheaper the call option price will be.

  • For Put options, ITM options (shaded in yellow) are at the lower right side of the table. As you can see, the higher the Strike Price (the further ITM the put options), the more expensive the put option price will be. On the other hand, OTM options (in white) are at the upper right side of the table. The lower the Strike Price (the further OTM the put options), the cheaper the put option price will be.

The picture above is the Option Chain for DELL with Expiration Month of Jun 07.
In this example, the last price of DELL is $26.02. This price is in between Strike Price 25 and 27.5.

Therefore, for Calls (at the left of the Strike Price column), the Strike Prices from 25 or lower are ITM options, while the Strike Prices from 27.5 or higher are OTM options.

And for Puts (at the right of the Strike Price column), the Strike Prices from 25 or lower are OTM options, while the Strike Prices from 27.5 or higher are ITM options.

Suppose you want to buy 2 contracts of DELL Jun 25 Call, the option price will be $1.7 (Ask Price), hence you need to pay: $340 (= $1.7 x 2 contract x 100 shares/contract).

Suppose you want to sell 2 contracts of DELL Jun 25 Call, the option price will be $1.6 (Bid Price), as such you will receive: $320 (= $1.6 x 2 contract x 100 shares/contract).

As you can see, if you buy an option and sell it immediately, you will lose $0.1 (=1.7 – 1.6) due to the Bid-Ask Price Spread.

Monday, May 14, 2007

Finally The Blogger Problem Is Solved!

After being in an “agony” for over one week, finally the posting, editing and layout problems in the Blogger are resolved! In fact, these problems are not due to Blogger system, but because of the internet service provider issues. Thanks to the suggestions from people with the same “fate” in Blogger Help Group that now we have a solution to this problem. Even though it’s only a temporary solution, I am happy enough so long as I can blog properly now. Have a good day!

Wednesday, May 9, 2007

My Plan For This Blog

I am still on the way in developing the series on options trading basic summary. Just bear with me if you find the postings are still theoretical and “dry”. I intend to make these series as a summary of important points you need to note on the basic of options trading. I also want to help those who wish to learn option trading even from scratch to give them some idea about options trading.

Subsequently, I plan to share on how to get started (e.g. finding online brokers, setting up real-time streaming charts, virtual trading, etc.). This is for the benefit of those who start from scratch at all, and still have no idea how to start trading.

Afterward, I will move on to discuss some basic on stock trading (e.g. fundamental & technical analysis, stock research, etc.), money management, trading plan, trading strategy, setup, and many other things.
Our ultimate goal is to strive for making consistent money with options trading. So, join us in the journey. :)

Tuesday, May 8, 2007

Another Problems With Blogger

I’m having another problems with the Blogger. I couldn’t make any posting. My “Create Post” template looks weird. The horizontal task bar is transposed to vertical bar. Luckily, I manage to find the solution to this problem from the Blogger Forum, so now I can make this posting. But I am still having a problem with my “Layout” template in the Blogger. The “Add Page Element” is now missing. I am still trying to find the solution to this problem.

Anyway, I will do more postings soon to catch up. Have a nice day!

Wednesday, May 2, 2007

Problems With New Version of Blogger: Cannot Publish A Long Post

I encounter some problems with new Blogger. Don’t understand why I cannot publish a long post. Every time I publish quite a long post, the system will give me a warning like “Cannot connect with Blogger……” At first, I thought there was a problem with connection or Blogger is doing maintenance. But this problem seemed to continue for a few days, until I realized that actually it’s because I was trying to publish a long post. When I made the post shorter, I managed to publish it. I guess, based on the experience I had, the max word count I can publish in one post is only 285. That’s why, if you notice, I got to split some postings with more than 285 words into Part 1 & Part 2, while actually it’s not really necessary. Quite irritating…

I know from the Blogger Forum that many people are experiencing the same problems. This issue is due to problems with Blogger system itself. If you ever had similar problem or have suggestion how to solve it, would be very grateful if you could share it with me. :)