What are Options on Stocks?

“Options on stocks, indices, and futures often get a bad rap. Journalists, pundits, and casual market observers criticize these derivative financial instruments as too complicated, subject to abuse, and difficult to understand, value, and trade profitably.”
– The Options Edge

The Options guide provides step by step explanations of what Options can do for you, here are some examples of what this book will inform you:

A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.

Option Contract Specifications
The following terms are specified in an option contract.

Option Type
The two types of stock options are puts and calls. Call options confers the buyer the right to buy the underlying stock while put options give him the rights to sell them.

Strike Price
The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised. It’s relation to the market value of the underlying asset affects the moneyness of the option and is a major determinant of the option’s premium.

In exchange for the rights conferred by the option, the option buyer have to pay the option seller a premium for carrying on the risk that comes with the obligation. The option premium depends on the strike price, volatility of the underlying, as well as the time remaining to expiration.

Contract Multiplier
The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the option is exercised. For stock options, each contract covers 100 shares.

The Options Market
Participants in the options market buy and sell call and put options. Those who buy options are called holders. Sellers of options are called writers. Option holders are said to have long positions, and writers are said to have short positions.

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