What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Monitor Stocks With Respect to Options

Original post by Ben Taylor of Demand Media

A stock option is a derivative security, which means its value is based upon the stock it represents. Options give an investor the right -- but not the obligation -- to buy or sell 100 shares of the stock it represents. Call options give the holder the right to buy the security at a predetermined price and a put option gives the holder the right to sell it. Trends on the buying side and selling side of an options transaction, such as the option's price and availability, can indicate how the security might trend over time, as well as how others valuate it.

Step 1

Download historical stock prices and options chains from information services such as Google Finance, Yahoo! Finance or Morningstar and record the data in a computer spreadsheet. In addition to the closing price of the stock you are monitoring, record the price of its options, the strike price, volume and expiration date of the options. Use a line graph to compare the volume of each option at a certain price to the price of its security.

Step 2

Analyze changes in the volume of call options available at a given price relative to the face value of the stock. Selling a call option indicates a short position in the stock, which means you anticipate the price will fall in a given time frame; buying a call option indicates a long position in the stock, which means you think the price will rise, according to the Investor Glossary website. If call options are more affordable and available for the stock, investors who sell call options have a bearish outlook for it.

Step 3

Analyze changes in the volume of put options available at a given price relative to the face value of the stock. Buying a put option indicates a short position in a stock; selling a put option indicates a long position in a stock. If put options are more affordable and available than call options, investors who sell put options on a stock have a more bullish outlook for it.

Step 4

Track changes in each option's strike price, which is the price at which the option holder can buy or sell the underlying security. More expensive options tend to have a more favorable strike price, according to "Futures" magazine, though the two almost exactly offset each other. An investor who purchases a stock option does so at a strike price that is close to the price she expects the security to be worth at a specific time.

Step 5

Monitor external factors, such as natural disasters, competition or even government regulation, that could explain changes in the stock's price and the availability of options. Building a robust field of data can help you track how a company's stocks and options react to external stimulus and can also help you explain those movements.

Step 6

Measure stock and options pricing trends for several companies in one market to gauge if one stock's trends are unique to that company or if those trends represent movements across the entire market. Track options and pricing trends for stocks in other markets as well, which will help you gauge how prices in one market sector react relative to another.

                   

Tips & Warnings

  • Update your stock and options data every day.

Things Needed

  • Stock price data
  • Stock options data
  • Computer spreadsheet

Resources

References

About the Author

Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.

Advertisement