How to Determine the Cost of a Call & Put
Call and put options are tradeable contracts with values based on the share price of an underlying stock. It seems like it should be easy to pick a stock and look up the current price of calls and puts for that stock. In reality, the task is a little more difficult -- starting with the fact that there will be hundreds of different put and call options trading against each stock. Also, the websites where investors normally go to look up stock prices do not carry option prices or the available options prices are not accurate. Market expectations determine put and call prices and a few techniques can put those prices on your computer screen.
Look up the current share price of the stock for which you want put and call pricing using the quote function of an online brokerage account to which you have access. Prices through an online account will be the most accurate, especially when the markets are open.Step 2
Select the "Option Chain" or similarly worded link next to the stock share price information. The option chain is the listing of all available options on a specific stock. A specific put or call option is defined by an expiration month and an exercise price on the underlying stock -- called the strike price.Step 3
Select a range of option prices to show on your computer screen. The typical brokerage website options chain allows you to select expiration months, puts, calls or puts and calls. You may be able to shorten the visible chain to those options with strike prices near the current price of the underlying stock.Step 4
Note the two prices listed for each put or call option with a specific strike price and expiration month. The prices will be listed as a bid price and an ask price. The ask price is the price you would pay if you placed a market order to buy that specific put or call. The bid price is the price at which a market sell order will be filled. The options screen will allow you to line up puts and calls for the same strike price, so that you can see the put and call values for the same parameters.
- Put and call prices are set by the supply and demand forces of the options market. A mathematical formula called the Black and Sholes model can be used to calculate a hypothetical value for any put or call options.
- If you do not have a brokerage account, you can sign up for a practice trading account with a broker specializing in options trading. The Chicago Board Options Exchange provides access to several paper trading accounts under the Tools menu on the exchange's website.
- Listed options prices are valid only when the trading markets are open. When the markets are closed, the market makers posting bid and ask prices adjust their quotes to prevent losing money from a news disruption while the markets are closed.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.