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What is Options?

What Are Options?

  • A Standardized Financial Contract with certain limited life.

  • Is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date?

  • Has two contracting parties – a BUYER and a SELLER (writer).

Option Buyer

  • Gains the Right to participate in the movement of the underlying by paying the seller a Premium.

  • Can convert the Right of surrogate participation into actual possession of the stock by Exercising his Option anytime during the life of the Contract.

Call Option Seller

  • The Obligation to SELL the stock at any time during the life of the contract.

Option Seller (Writer)

  • Assumes the risk of the movement of the underlying in exchange for receiving the Premium.

  • Risks Assignment of the stock at any time during the life of the Contract under the obligation incurred from the Buyer.

Put Option Seller

  • The Obligation to BUY the stock at any time during the life of the contract.

Strike Price

  • Defines the value to be exchanged

Premium

  • The “Price” an Option Buyer pays and “amount” an Option Seller receive

Expiration Date

  • Term of enforcement

Options “Chain”

 

Types of Options

Call: Buy a Call: If you expect Stock price move up; Sell a Call, if you future stock price to move lower.

Put: Buy a Put, if you expect future stock price move lower; Sell a Put if you expect the future price to move higher.

 

Options Quote Example

SELL 5  DAR JUL 24 PUT @ 3.70

 

Explanation:

5:  Number of Option Contracts  (5 X 100 shares)

DAR: The Underlying Stock

JUL: The option expires on the 3rd Friday of this month.

24: the Strike Price.  The price at which the DAR stock  will change hands if exercised

PUT: Type of Option 

@ 3.70: Premium, your income because you sell Option. If you sell 500 shares, so your income generated is 500x$3.70= $ 1,850

 

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