Stock Options Basics

Stock options provide advanced investors with more ways to make money in the stock market, and in fact, they
At their most basic level, stock options are a contract between a buyer and a seller that gives the buyer the right to buy (with a call option) or sell (with a put option) 100 shares of a particular stock to the seller of the option at a specific price, by a certain date. It is important to note that the option buyer is under no obligation to exercise their option, so the option buyer’s total risk is limited to the amount they paid for the option.
Call options give the option buyer the right to buy 100 shares of the underlying stock at the strike price in the option contract by the date specified in the options contract. The call option buyer is not obligated to exercise the contract, but if the buyer chooses to exercise the contract, the seller is obligated to sell 100 shares of stock at the strike price. From the option buyers perspective, a call option is a bet on the underlying stock gaining in share price. A call option becomes more valuable as the price of the underlying stock goes up.

Put options give an option buyer the right to sell 100 shares of an underlying stock at the strike price that the option contract was written for. While the put option buyer is not obligated to exercise the contract, if the buyer does exercise the contract, the option seller is obligated to pay the contract price for 100 shares of the underlying stock from the contract buyer, on or before the expiration date of the contract. Put option buyers are betting that the price of the underlying stock will move down. A put option becomes more valuable when the price of the underlying stock goes down.

are one of the most versatile trading vehicles available. Options on stocks are highly leveraged derivative investments, with a very well defined risk/reward profile.

Stock options are traded in regulated exchanges (or markets), and depending on their liquidity, their price moves up and down throughout the day due to such factors as supply and demand, movement in the price of the underlying stock, length of time until the contract expires. Contracts on standardized options typically expire on the third Friday of their expiration month. For example, if you bought a July call option contract, it would expire on the third Friday in July.
Stock options are a popular way to control risk in a stock portfolio. They are also widely used by individual investors to generate income through strategies like covered call writing. While equity options may seem a little confusing at first, it is well worth the effort to learn about them.
 

 

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