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Option Basics and Fundamentals

December 13th, 2012

Option Basics

  • Options are contracts
  • You pay a premium for them
  • You are able to buy or sell stock
  • 1 option = 100 shares
  • They expire the third Friday of the month you purchase them for
  • Strike price = expiration price
  • You pay a premium
  • The option gets traded and sold versus the stock
  • Most people just trade the contracts

Example

  • Think of options like buying a house
  • You find a house that you like in an area where the houses are selling for $150k. You knock on the door and ask to buy the house. You are willing to give $10k up front if the house is sold to you within 6 months for $200k.
  • It is a win-win situation.
  • The homeowner gets the $10k and you get the option to purchase the house in the future and you can do research to check if the area is¬†actually¬†developing.
  • You have the right, but not the obligation to purchase the house. You pay $10k in order to have the option to buy it.
  • If someone gave the homeowner a higher bid, the homeowner would not be able to sell the house because you have the legal right to buy it in the future for $200k.
  • The homeowner would have to buy out the contract with you before selling the house for $300k.

Types of Options

1. Call

  • You are expecting the stock to go up

2. Put

  • You are expecting the stock to go down

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

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