As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. This word is often associated with excessive risk-taking and having the ability to bring down economies. Post as a guest Name. American financier, Russell Sage, created these options in The author may or may not have positions in Financial Instruments discussed in this newsletter. Trader Travis's YouTube Channel.
Definition of Stock Options: If you buy or own a stock option contract it gives you the "right", but not the "obligation", to buy or sell shares of a stock at a "set price" on or before a given "date" (time period). After this date, your contract expires and your option ceases to exist.
So What are Stock Options and Why Should You Care?
Once you understand the world of options, all these possibilities are open. Stay tuned for future articles. If this piques your interest, check with your local center on option classes offered in your area. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.
Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein.
Past performance does not guarantee future results. It's relation to the market value of the underlying asset affects the moneyness of the option and is a major determinant of the option's premium. In exchange for the rights conferred by the option, the option buyer have to pay the option seller a premium for carrying on the risk that comes with the obligation.
The option premium depends on the strike price, volatility of the underlying, as well as the time remaining to expiration. Option contracts are wasting assets and all options expire after a period of time. Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless.
The expiration month is specified for each option contract. The specific date on which expiration occurs depends on the type of option. For instance, stock options listed in the United States expire on the third Friday of the expiration month. An option contract can be either american style or european style. The manner in which options can be exercised also depends on the style of the option.
American style options can be exercised anytime before expiration while european style options can only be exercise on expiration date itself. All of the stock options currently traded in the marketplaces are american-style options. The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the option holder in the event the option is exercised. In the case of stock options, the underlying asset refers to the shares of a specific company.
Options are also available for other types of securities such as currencies, indices and commodities. The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the option is exercised. For stock options, each contract covers shares. For the sake of simplicity, I'm going to refer to options on stocks only, even though options can be traded on commodities and other securities as well. They are merely contracts that grant you certain rights". Definition of Stock Options: If you buy or own a stock option contract it gives you the "right", but not the "obligation", to buy or sell shares of a stock at a "set price" on or before a given "date" time period.
After this date, your contract expires and your option ceases to exist. For example, a contract at a country club may grant you the right to use the country club whenever you choose to, but you're not obligated to use it.
It's not like they're going to send the country club police to your house and make you go there. So when you buy 1 contract you are buying the right to buy or sell shares of that stock. I have a one year contract with a local gym here. It gives me the right, but not the obligation, to go to the gym whenever I want for a year.
They don't make me go, but if I don't exercise my right to go then I lose the money I paid for this right. Well stock option contracts grant you the rights listed above, but you don't have to buy or sell the stock if you don't want to. If you don't exercise the rights of your contract then you simply lose the money paid for the contracts. Understanding stock options can be hard at first and it doesn't help that that dictionary definition of stock options reads as follows:. A right to buy or sell specific securities or commodities at a stated price within a specified time.
Understanding stock options becomes easier once you realize that everything boils down to two components: Puts and Calls are the only two types of stock options. Everything else is just a variation or combination of these two. The "Put" option gives its buyer the right, but not the obligation, to "sell" shares of a stock at a specified price on or before a given date. The "Call" option gives its buyer the right, but not the obligation, to "buy" shares of a stock at a specified price on or before a given date.
The definition of Puts and Calls is given here as an overview.
To explain option trading, the first thing that must be made clear is what a stock option is. According to zooguillem.ga Dictionary, a stock option is “the right to purchase stock in the future at a price set at the time the option is granted (by sale or as compensation by the corporation). A Simple Explanation of Options Calls and Puts Above is a small sample of the options for Apple stock for just one expiration date, December 16, The Strike column in the center of the chain lists the strike prices that are available. A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.