Options are notoriously known for being intimidating to strangers—but they don’t have to be. Before trading options, a good way to get a grasp on them is to start by understanding option alerts.
Not only will this help you understand options better, but it can give you valuable information on how traders are feeling toward a particular stock. Continue reading to learn how to read option alerts.
What are Options Contracts?
Before you learn how to understand an option alert, it’s important to understand what an options contract is. According to Investopedia, an option contract “…is an agreement between two parties to facilitate a potential transaction on the underlying security at a preset price, prior to the expiration date.”
To break that down further, an option contract gives you the right to buy or sell a stock at a predetermined price by a certain date.
There are two types of options contracts: puts and calls. Put options indicate the right to sell shares, while call options indicate the right to buy shares as indicated in the contract. One option contract holds 100 shares.
Option Alert Terminology
Next, you’ll want to make sure you understand the terminology used around options. A few terms you should know include:
- Call Contracts: The right to buy shares as indicated in the contract.
- Calls at the Ask: A bullish indication.
- Calls at the Bid: A bearish indication.
- Earnings: Indicates the asset’s next earnings date.
- Expiration: When the contract expires. You must act on the contract by this date if you want to use it.
- Open Interest: Activity in the contract over course of contracts history. In the options alert, it is abbreviated to OI.
- Premium: The price of the contract.
- Puts at the Ask: A bearish indication.
- Puts at the Bid: A bullish indication.
- Put Contracts The right to sell shares as indicated in the contract.
- Ref: The price of the stock when the option was lifted.
- Strike Price: The agreed-upon price you can buy/sell the asset if you redeem the contract.
- Sweep: This means there is a large order than is broken up into smaller orders. This helps the order get filled quicker. In the options alert, this will be followed by the number of sources.
- Volume: Activity in the contract for the current session.
- @: An @ in an option alerts comes before the price of the premium, or price of the contract.
Read More: Trading Terminology
How to Breakdown an Option Alert
An option alert will typically read like the following:
[Company ticker] Option Alert: [expiration] $[strike price] [call or put] Sweep ([number of sources orders coming from]) [near/at the ask/bid]: [current volume] @ $[price of contract] vs [open interest for contract] OI; Ref = [last price underlying stock traded at]
Here’s an example:
How to Read:
The alert is for Microsoft and indicates a July 27th expiration date. $99 indicates that the buyer can purchase shares for that amount. Calls indicate the right to buy the shares. At the Ask means the purchaser is bullish and is likely expecting the share price to be much higher before the contract expires. 989 is the volume of contracts for the current session.
Sweep indicates the trade was broken down into 25 orders. Since options are traded by 100 shares, this represents 2,500 shares of Microsoft stock at a total price of $247,500. $3.05 is the premium or price of the contract per share.
OI means open interest, or how many open contracts there are during the contract’s history. In this case, there are 312 contracts open.
Earnings 7/19 shows that Microsoft’s next earnings date, which is before this contract expires.
Finally, Ref=$99.05 shows the last price the stock was sold at.
Read More: How to Find Unusual Options Activity
Options can be intimidating to new traders, but once you learn how to read alerts, it becomes another tool to get a feel for a particular stock.
Free Webinar: Unusual Options Activity
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