- 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
- 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
- You are expecting the stock to go up
- You are expecting the stock to go down