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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)

Contract specifications

  • 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 = 200 you 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

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