How much will I actually pay for an option contract quoted at $1.50
What do options quotes mean? If an option is quoted as $1.50 for an April 40 call is that really for 100 shares so my real cost would be $150 plus the commision, so another $7 or $8? And when the open interest for that same contract is 1,800 does that mean it would cost me $270,000 to buy all open contracts at the $1.50 price?
Answers
2082 points
alanj answered 8 months ago …
Yes to the first part. I'm assuming you mean the Ask price is $1.50. That's $1.50 per share and there are 100 shares in a contract. If you want an immediate purchase you pay the Asking price, if you are willing to wait you can put in your own Bid and see if someone will agree to your bid. It's just like an auction. For the second part- Not everyone will want to sell at the current asking price. Maybe they just recently bought their contracts and are waiting for the price to increase before they sell. So, you won't be able to buy all 1800 contracts for $1.50. But, if there where 1800 contracts available at the Asking price and you wanted to buy them all it would cost you $270,000.00 plus your broker fees. Some brokers will list how many contracts are available for the Asking price. For a definition for Open Interest click here http://www.tickerhound.com/dictionary/word/3445/open-interest
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989 points
rvilmur answered 8 months ago …
Multiplying the option quoted price by 100 is correct; but you will have to pay the asked price on a buy. If the bid asked spread is wide you would want to put in a limit order near the center of the bid asked spread and have a reasonable expectation that the stock price fluctuation will get you filled. I always use a limit order with options as with thinly traded options, the market maker can and will take advantage of a market order by raising the asked price before filling you. The asked price is supposed to be good for 10 contracts; but I don't think that the options exchanges police that well.
Open interest is the number of option contracts that are outstanding for a particular stock and strike price. If you bought 1800 contracts you would be doubling the open interest to 3600 because you are buying to OPEN new contracts. Old contracts can only be sold to CLOSE or expire on the expiration date.
2082 points
alanj answered 8 months ago …
Yes to the first part. And only if you wanted an immediate purchase, you would pay the Asking price. I assume you mean Asking price not Bid. It's just like an auction. You don't have to pay the Asking price, you can put in your own bid if you are willing to wait.
For the second part- only if all 1800 where available which they won't be. Plus your broker fees. For a definition of Open Interest click. http://www.tickerhound.com/dictionary/word/3445/open-interest
108 points
DawnPennington answered 8 months ago …
You'll pay $1.50 if it is the ask price and if there is a seller available willing to accept $1.50 per share ($150/contract) from you. You can put in a limit order at $1.50 to ensure that you don't pay more than that; however, the risk with limit orders is that the option trades above that price and you won't get in at all unless you adjust your order. The beauty of the limit order, though, is that you can get in lower than $1.50 if a seller is willing to accept less than the price at which he/she is offering their option.
As far as buying out the open interest, there is no guarantee that you could get all the contracts at $1.50. You may be able to get some at $1.35 and others in the $2 range, depending on what the sellers are asking. And you wouldn't be cornering the market in that particular option, as open interest expands to fit demand. With options, you just want to buy as many contracts as you normally would with stock. If you're only comfortable owning 500 shares of any given stock, you don't want to buy more than five options contracts. Always be mindful of the immense leverage that options enables you to wield!
