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Understanding Option Prices

 August 08, 2007 11:05 PM


 

Option premiums or prices can be a little difficult to understand at first. But after a little bit of practice on your part, you'll soon get the hang of it. Remember that the strike price of an option is not its price. Rather, the strike price, along with other features such as option expiration, determine the price of an option. Option premiums are typically quoted in units as defined by the underlying futures contract. While these values may look like dollar amounts, they are not. The proper way to calculate the dollar value of an option is to multiply the option price by the size of the contract. The contract size is set by the exchange on which the option trades and may change.

To help you along, we have provided below sample prices of commonly traded options and the calculation of their dollar values or prices. Note that these option prices are not meant to reflect actual market prices at any given time. Use values only as a guide for the calculation.

Option Example of Option Complete Option Contract Value of
Contract Price Units Price Size Option
 (A) (B) (A) x (B)
Canadian dollar(IMM) 0.46 cents per CD $.0046/CD 100,000 CD $460 
Feeder Cattle(CME) 1.55 cents per pound $.0155/lb 50,000 lbs $775 
Live Cattle(CME) 1.78 cents per pound $.0178/lb 40,000 lbs $712 
Cocoa(CSCE) 45 $ per ton $45/ton 10 tons $450 
Corn(CBOT) 16 3/4 cents per bushel $.1675/bu 5,000 bu $837.50 
Cotton(NYCE) 1.87 cents per pound $.0187/lb 50,000 lbs $935 
Crude oil(NYMEX) 0.86 $ per barrel $.86/bbl 1,000 barrels $860 
DJIA(CBOT) 5620 points 562.0 points $10 per point $5,620 
Eurodollar(IMM) 0.185 pts. of 100% 18.5 basis pts $25 per basis pt $462.50 
Gasoline(NYMEX) 0.0147 $ per gallon $.0147/gal 42,000 gal $617.40 
Gold(COMEX) 4.65 $ per ounce $4.65/ounce 100 ounces $465 
Heating oil(NYMEX) 0.0258 $ per gallon $.0258/gal 42,000 gal $1,083.60 
Hogs(CME) 1.22 cents per pound $.0122/lb 40,000 lbs $488 
Natural gas(NYMEX) 0.152 $ per MMBtu $.152/MMBtu 10,000 MMBtu $1,520 
NYSE Index(NYCE) 1.65 Points 1.65 pts $500 per point $825 
Orange juice(NYCE) 4.25 cents per pound $.0425/lb 15,000 lbs $637.50 
Pork bellies(CME) 1.35 cents per pound $.0135/lb 40,000 lbs $540 
S & P 500(CME) 27.50 points 27.50 points $250 per point $6,875 
E-Mini(CME) 27.50 points 27.50 points $50 per point $1,375 
Silver(COMEX) 6.8 cents per ounce $.068/ounce 5,000 ounces $340 
Soybean oil(CBOT) 0.93 cents per pound $.0093/lb 60,000 lbs $558 
Soybeans(CBOT) 16 1/2 cents per bushel $.165/bu 5,000 bu $825 
Sugar(CSCE) 0.35 cents per pound $.0035/lb 112,000 lbs $392 
U.S. bonds(CBOT) 1-56 pts and 64th of a point 1 56/64 pts $1,000 per point $1,875 
USDX(NYCE) 0.77 points 0.77 points $1,000 per point $770 
Wheat(CBOT) 13 5/8 cents per bushel $.13625/bu 5,000 bu $681.25


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