Want To Know What Stock Option Are ?
Calls and Puts
Buying a call option gives you the right but not the obligation to buy a stock at a set price on or before the set date. “ I can call away stock”.
Selling a call you are obligated to sell a stock at a set price on or before the set date. “My stock can get called away”.
Buying a put gives you the right, but not the obligation to sell a stock at a set price on or before the set date. “ I can put the stock to the market”.
Selling a put you are obligated to buy a stock at a set price on or before the set date. “I can be put the stock”.
Basic Option Terms
An option gives the buyer the right but not the obligation to buy (call) or sell (put) the stock that option is tied to. Furthermore the option is for a specific price (strike) and for a specific period of time (expiration).
It is a instrument that you can use to reserve the right to buy or sell the stock at the price you want if the stock moves in the direction that you thought it would in the time frame of the contract.
Option buying strategies are directional:
Buying calls = Bullish
Buying puts = Bearish
Selling calls = Bearish
Selling puts = Bullish
Option Contracts
Stocks are traded in shares but options are traded in contracts. Each contract controls 100 shares of a stock. When you purchase an option you have control of 100 shares of the stock at a certain price and for a given time.
This may sound like a completely foreign concept to you at first, but stop and think about what the word option really means. If you have options you have choices – plain and simple. You can buy an option (call) or sell an option (put) at the strike price, but you do not have to, you have the choice.
Why do most traders get excited about options?
Leverage! Let’s say that you have been limiting the stocks that you can trade based upon price. Say your limit has been $45 because your astute risk management plan has such a cap. If this is the case that’s great, you’ve got a nice system in place for trading stocks and if it has worked then stick with it. However, as an options specialist, you are truly unlimited in that you can now afford any stock. A few exceptions are not all stocks have options and some stocks that do have options are thinly traded and you wouldn’t want to be trading them anyway.
Premium
An options premium is the amount you have to pay to buy it. Just as with stocks if you place a market order then you will always buy at the ask price and sell at the bid price. Remember though that one options contract controls 100 shares of the underlying stock. So you have to multiply the ask price by 100 for the total dollar cost of the trade.
In The Money
An option becomes in the money when the price of the stock moves past the strike price of the option. The further the price of a stock moves above a given strike price the deeper in the money the call option with that strike price will become. By the same token the further the price of a stock moves below a given strike price the deeper in the money the put option with that strike price will be.
Calls make money when the price goes up.
Puts make money when the price goes down.
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