In a nutshell, the buyer of call stock options profits when the stock goes up and the buyer of put stock options profits when the stock goes down. Conversely, the seller of call stock options profits when the stock goes down and the seller of put stock options profits when the stock goes up. Every stock options contract traded in the Stock Options Trading Exchanges are written with the following standardized specifications. Lot Size : The number of shares of the underlying stock that is represented with each stock options contract. Exotic Options : Exotic options are Stock Options that are highly customized and complex and usually traded only in OTC markets.
You are trading with exchange traded stock options when you open a brokerage account to trade options of publicly listed companies. LEAPS : Options with very long expiration months (9 months or more in the future) are known as a LEAPS. Many option traders, including financial institutes, today still refer to LEAPS as simply "LEAP".
Quarterly Options : Introduced in 2006, these are options that expire at the end of every quarter and could co-exist with regular options with the same expiration month. All exchange traded stock options in the US market are American Style Options which you can exercise at anytime you want to.
On top of that, Stock Options leverage or "gearing" can be precisely calculated and variable as the Options Moneyness changes. Due to the variable nature of Stock Options leverage, many different trading styles can be applied successfully using Stock Options. Example : ABC company is trading at $700 per share while its $700 strike price call options are trading at $15.
Intrinsic value is the portion of the underlying stock's value that is already built into the stock options contract. Conversely, options traders who buy put options wants to profit from the build up in intrinsic value as the stock goes lower and lower. There are also options traders who would rather "play the bookie" and become writers or sellers of stock options.
XYZ company at $40 becomes worthless, or out of the money, and you pocket the $2.00 from the sale of the put options as profit. It has found it's place not only in the stock markets but also as employee benefits in order to participate in a company's growth. If the stock falls, the buyer of the put options would still be able to sell the stocks to the seller at the higher price agreed, making a profit out of the seller.
It enables option traders to customise key contract terms like expiration date, exercise style and exercise price.
Intrinsic value is therefore pretty straight forward and is the main component of profiting from stock options trading. Like insurance, Stock options contracts comes with a price to own whether or not they get exercised. Profiting from a move in the underlying stock is probably the most popular way of profiting in stock options trading.
Since you paid $2 to own the put options and get to sell those put options for $10 now, a $8 profit results. Learning about what stock options are is a must for anyone who wishes to participate in options trading. As long term in the money LEAPS call options behave almost exactly like its underlying asset, it is a great way to control the same quantity of the underlying asset at a discount or to leverage the same amount of money to control more quantity of the underlying asset. This tutorial shall provide a free, indepth look into what stock options are, the different types of stock options, how they work and much more, written in layman terms and explained with pictures. Trading of FLEX options are generally open only for large institutes which fulfills their stringent financial requirements.
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