What is an Option?
An option is a derivative financial instrument that establishes a contract between two parties concerning the buying or selling of an asset at a fixed market price. The option will have some kind of underlying security that it is based upon like a stock or an ETF or an Index.
Lingo in the Options World
Calls - The contract when purchased gives you RIGHT to buy (BUY to OPEN)
Puts - The contract when purchased gives you RIGHT to SELL (BUY TO OPEN)
Strike Price: The price at which an underlying stock can be purchased or sold
Expiration Date: The date till the contract is valid.
From Wikipedia....
The basic trades of traded stock options (American style)
These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging. An option contract in US markets usually represents 100 shares of the underlying security.[17]
[edit]Long call
A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just purchase the stock itself. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium (price) paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can control (leverage) a much larger number of shares.
[edit]Long put
A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid.
[edit]Short call
A trader who believes that a stock price will decrease, can sell the stock short or instead sell, or "write," a call. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited.
[edit]Short put
A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. A benchmark index for the performance of a cash-secured short put option position is the CBOE S&P 500 PutWrite Index (ticker PUT).
1 comments:
If you have comments or questions, Please post it here.. I will try to answer them ASAP.
Post a Comment