A Stock Option is a financial derivative instrument which establishes a contract between the buyer and the seller of a designated asset.
Because in every Stock Option contract, there is a Buyer and a Seller, I will explain the difference between a Call Option and a Put option, from the perspective of both the Buyer and the Seller. As a Holder (Buyer) of a Call Option, you have the Right, but not the obligation, to Buy the asset (stock) at the strike price, should you choose to exercise the option, on or before the contract expiry date.
As a Holder (Buyer) of a Put Option, you have the Right, but not the obligation, to Sell the asset (stock) at the strike price, should you choose to exercised the option, on or before the contract expiry date. The Option Holder, after buying the option, is looking for the option to increase in value, so the option can be either sold at a profit, or exercise the option at a better price than the current price. As a Writer (Seller) of a Call Option you have the Obligation to the Buyer, to Sell an asset (stock) at the strike price, should the buyer choose to exercise the option, on or before the contract expiry date. As a Writer (Seller) of a Put Option you have the Obligation to the Buyer, to Buy an asset (stock) at the strike price, should the buyer choose to exercise the option, on or before the contract expiry date.
The Writer, after writing (selling) the option, pockets the premium (cost of option), and is looking for the option to decrease in value, if not expire completely worthless.
During the life of an option (after being first written), an option may be bought and sold many times as the price of that option fluctuates, but the contract is always between the original writer and the current option holder.
In the US Option Market, each (1) option contract controls 100 shares of a security (in Australia is 1 for 1000 shares).
All Option Contracts are good up until a defined expiration date, after which point, the contract becomes null and void. As the option prices are based upon the value of an underlying security(stock), they are referred to as derivatives.
The Intrinsic Value, which is always derived from difference between the stock price, the strike price. The Extrinsic Value, which is derived from the time remaining until expiration, and the volatility of the stock and or market. Extrinsic Value of an Stock Option decreases over time, to a point where the Extrinsic value is worthless at or close to expiration. The first time I had Stock Options Explained to me, was the day I realized the power of Stock Options. Yes Stock Options are a powerful tool that you can use in the market to your advantage, knowledge and execution are the key.
One of the hardest things to comprehend when learning options is being able to sit on both sides of the desk. I agree, having a good grasp of what options are and how they work, can really speed the process of mastering Option Strategies.
As a stock options trader myself, you have done a great job explaining what a stock option is.
Stock Options are contracts that grant the holder the right to buy or sell a specific stock at a specific price before the contract expires.
I like the leverage of trading stock options and the extra income it brings in for stock owners with covered call writing. As you will see, in the following article, I will uncover how Stock Options can help your Portfolio. I also realized I didn’t have to know every Stock Market Options Strategy in the book, just to be good at a few that suited my style. Stock options are one of the most creative innovative and flexible financial derivative instrument that has ever been created.
Everyone understands taking a fast gamble, but the subtleties of selling options should be much more interesting to new investors, especially those who have large existing portfolios. So it is worth getting some Advanced Option Trading Education to learn all you need to know to be successful with those strategies. Learning about what stock options are is a also must for anyone who wishes to participate in options trading. You even begin to realise that having stock options can be safer than simply buying the underlying stock without options.
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