How to Understand Option Alerts

Options are infamous for intimidating traders—but they don’t have to be. Before trading options, a good way to get a grasp them is to start by understanding option alerts.

However, you don’t even need to trade options to find these alerts valuable—they can give you valuable information on how traders are feeling toward a particular stock.

What are Options Contracts?

Before you learn how to understand an option alert, it’s important to first understand what an options contract is. An options contract is an agreement to buy or sell stock at some point in the future. In short, you are speculating that a stock will reach a certain price. Generally speaking, if your speculation is accurate, your options trade will have a significant ROI.

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 at a strike price
Call options indicate the right (but not the obligation) to buy shares as indicated in the contract.

Note: 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.

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:

This specific example is for Microsoft and indicates a July 27th expiration date. The $99 indicates that the buyer can purchase shares for that amount. The “Calls” indicate the right to buy the shares. “Sweep” indicates the trade was broken down into the parenthesized amount of 25 orders. At the “Ask” which means the purchaser is buying at that price and is bullish: expecting the share price to be much higher before the contract expires. The 989 refers to the volume of contracts for the current session.

$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 July 19th in this example.

Options trading is becoming increasingly popular. March 2022 was the second highest month on record of options trading.

Final Thoughts

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.

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