– Options are contracts
– You pay a premium for them
– You are able to buy or sell stock
– 1 option = 100 shares
– They expire the third Friday of the month you purchase them for
– Strike price = expiration price
– You pay a premium
– The option gets traded and sold versus the stock
– Most people just trade the contracts
Example:
– Think of options like buying a house
– You find a house that you like in an area where the houses are selling for $150k. You knock on the door and ask to buy the house. You are willing to give $10k upfront if the house is sold to you within 6 months for $200k.
– It is a win-win situation.
– The homeowner gets the $10k and you get the option to purchase the house in the future and you can do research to check if the area is actually developing.
– You have the right, but not the obligation to purchase the house. You pay $10k in order to have the option to buy it.
– If someone gave the homeowner a higher bid, the homeowner would not be able to sell the house because you have the legal right to buy it in the future for $200k.
– The homeowner would have to buy out the contract with you before selling the house for $300k.
Types of Options:
1. Call – You are expecting the stock to go up
2. Put – You are expecting the stock to go down
#optionbasics #optionfundamentals #stockoptions #tradingoptions
Posted at: https://tradersfly.com/blog/option-basics-and-fundamentals/
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