Intro to Options
What is an option?
- A contract (i.e. just like any other contract) that gives the owner the ability to buy/sell a stock as a set price and time
- The contract has defined specifications. These specifications are the same for al stocks (you just have to learn them once; not once per stock)
- These contracts can be bought and sold in a market (a seperate market from where the stock trades)
Underlying stock - The stock that the contract is for
Type - Buy (call) or sell (put) the stock (there are only two types of options; this is fixed in the contract)
Strike price - Price that owner can buy/sell the stock at. E.g. strike price is $100, you can buy/sell a stock at this price (this is fixed in the contract)
Expiration date - The option only exists for a certain amout of time
Price - What the option is worth in the options market
Size - Each option contract represents 100 shares of the underlying stock.
strike price * size = price that you pay for the options e.g.
2 * 100 = 200you are paying $200 to have an option that has a price of $2
Options allow you to take advantage of the passage of time, manage risk, they add flexibility etc