This is the introduction and Basic Stock Option Definitions Guide.
Before investors begin to invest the traditional method, Buy Low, Sell High, it’s vital for them to understand stock options.
A stock option is a contract between two investors or parties, to which the stock option buyer, purchases the right (but not the obligation) to buy/sell shares of an underlying stock at a predetermined price from the option seller (writer) within a fixed period of time. One option contract is theoretical to 100 shares. This is important to understand as options can be leveraged and the overall profitability returns can be huge, but also the losses as well!
Definitions within the stock options investing world.
These are common stock option terms that any investor will come across and it is vital for you to understand these.
Strike Price The strike price is the price at which the investor’s target is aimed at, or any specific price other than the current price of the stock.
Option Type There are two types of options, and those are CALLS and PUTS. Call options are generally bullish if bought, and bearish if sold. Put options are bearish if bought, and bullish if sold. I will explain that later or you can find exactly what I mean by purchasing my Treat Stocks Like Real Estate eBook!
Premium The cash or profit that any option seller takes in, exchanged for risk associated with the chance of being called or put shares of that stock. The amount of premium is determined by a few variables including volatility, strike price, as well as expiration date.
Expiration Date Unlike buying stocks and being able to hold until sold, or bankruptcy filings, stock options expire. These are determined by the market and generally ends every Friday. Stock options either expire worthless or hold intrinsic value based off whether it is a call option, put option or other type of spread that had been created.
Option Style 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.
Underlying Asset 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.
Contract Multiplier 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 100 shares.
The Options Market Participants in the options market buy and sell call and put options. Those who buy options are called holders. Sellers of options are called writers. Option holders are said to have long positions, and writers are said to have short positions.
If this basic stock option definitions guide helped you, comment down below and let me know of any questions that you have!
