by Karim Rahemtulla, Options Expert
Tuesday, February 2, 2010: Issue #1188

It took a while, but an increasing number of investors are starting to realize the powerful benefits behind the options market. Namely, to make money and hedge against risk.

In fact, the rising popularity has resulted in the options market being the fastest-growing segment of the entire investment arena.

And with more and more people getting involved, the folks who design the options trading rules are making the most significant changes in more than three decades.

But no matter whether you’re a fresh-faced rookie or wily veteran, these changes impact all options investors directly and should make the trading process much easier and less error-prone. I found this out myself for the first time yesterday morning…

The Options Market’s Confusing Symbol Setup

I’ll bet that the one part of an options trade that puts people off is the confusing symbol setup.

For example, when making a call or put trade in the old format, you would enter a symbol made up of various letters.

Let’s take the Goldcorp (NYSE: GG) March $30 call option. The symbol you’d ordinarily enter would be “GG-CF.”

The “GG” part is pretty straightforward – it reflects the underlying stock.

But the last two letters aren’t so straightforward. What exactly do they mean?

• The First Letter: This denotes the expiration month of the options. The letters follow the letters of the alphabet. For example, January would be “A”… February would be “B”… March would be “C,” etc. No exceptions.
• The Second Letter: This one indicates the strike price of the options – the price at which the buyer or seller has the right to buy or sell the underlying shares. For the most part, this also follows the alphabet, with “A” representing $5, “B” representing $10 and so forth. But there are many exceptions to this, especially with options that trade in $1, or $2.50 increments.

So in the Goldcorp example above – GG-CF – the “C” represents March and “F” signals the $30 strike price.

But the current changes make things much simpler…

Making the Options Market More Logical for Investors

Forget using letters to indicate expiration months and strike prices. If you trade options, you’ll now enter the information using the underlying symbol, the strike price, and the expiration date using the good, old-fashioned day, month and year of expiration.

Yesterday morning, for example, I sold some Microsoft February $27 puts (obligating me to buy MSFT for $27 at the expiration if the stock closes below $27). Here’s how it worked…

• Went to the options screen in my trading platform and entered Microsoft’s symbol – MSFT.
• Pulled up Microsoft’s options chain (this is a list of all the available Microsoft options).
• Selected the expiration date and strike price with the mouse… and voila! The trade was automatically entered on my screen, waiting for me to execute it.

You can pull up all this information when you enter the trade. In fact, it allows for far fewer errors.

It might take a little time to get used to this format (it will appear in this way on your statements, too). But now that options trade in smaller strike price increments, it will make it easier to input the exact option, without having to deal with confusing letters.

Good investing,

Karim Rahemtulla

View original at: Investment U

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