← BeginnerLesson 5 · 4:32
What does one contract actually cost?
Summary
You can turn a quoted option price into what one contract really costs, because a standard stock option covers 100 shares. You know you buy at the ask and sell at the bid, and you can work out what the spread costs you on a round trip. You can say the most you could lose buying the call, including what you actually paid.
Key terms
- 100 shares per contract
- bid
- The most someone is offering to pay right now, which is the price you can sell at.
- ask
- The lowest price someone will sell at right now, which is the price you pay to buy right away.
- spread
- The gap between the bid and the ask, which costs you money from the moment you buy.
- round trip
- Buying and then selling the same option; with no move in the stock it costs you the spread.
- commission
- A fee your broker may charge for each trade, which can apply on both the buy and the sell.
- broker
- The firm that places your trades for you.
- contract size
- A standard stock option contract covers 100 shares, so you multiply the quoted price by 100.
Check yourself
Answer each question to see why the right answer is right.
1. An option's price says $3.45. How much does one contract cost at that price?
2. When you want to buy an option right away, which price do you pay?
3. The XYZ call is quoted $3.40 bid, $3.50 ask. You buy one contract, change your mind and sell it straight back, and XYZ hasn't moved. What has the round trip cost you?
4. Another quote has the same halfway price: $3.25 bid, $3.65 ask. What does the same round trip cost you?
5. You buy the call quoted $3.40 bid, $3.50 ask. What is the most you can lose?
Finished the video and the quiz? .