| Option:
A contract that allows the owner the
right to buy or sell 100 shares of a specific
company’s common stock, at a specific fixed price,
by a specific date, in the future. This contract
freezes the price of the stock until the contract
expires. Options are offered on only a limited number
of stocks.
Underlying
Stock: The
specific company’s common stock that an option is
written for. The market value
of this stock will determine the options value in the
market.
Strike price:
The specified fixed price that the option contract
allows you to buy or sell the stock for is called the
strike price.
Exercised:
When an option contract is executed or used to buy or
sell the specific stock the option was written for is
considered exercised.
Expiration
Date: The
third Saturday of the month an option is written for
is the expiration date. Because the stock market is
closed on Saturday, all option transactions must be
played out by the close of the stock market on Friday.
The biggest difference between stock and options is
the fact that options are time dependent and will
expire with no value on the expiration date.
Increment:
Certain
preset prices available for purchasing options are known
as increments. When a stock is priced $5 to $25 the
increment is $2.50. When the stock is priced $25 to
$200 the increment is $5, and when the stock is priced
over $200, the increment is $10.
Call
Option: Allows the owner the right to buy 100
shares of a predetermined stock on or before the
expiration date at the strike price written in that
contract. An August $150 call option would have an
expiration date the third Saturday of August and a
strike price or right to purchase stock at $150.
Put Option:
A put option allows the owner the right to sell
100 shares of a predetermined stock on or before the
expiration date at the strike price written in that
contract. An August $150 put option would have an
expiration date the third Saturday of August and a
strike price or right to sell stock at $150.
Buying
a Call Option: When you buy a call you
pay a premium for the right to buy stock. If the
decision is made to exercise the call option, you will
purchase stock for the strike price written in the
contract. The strategy for buying a call option is an
up-trending stock chart or an increasing stock value.
Buying a
Put Option: When
you buy a put you pay a premium for the right to sell
stock. If the decision is made to exercise the put
option, you will sell stock for the strike price
written in the contract. The strategy for buying a put
option is a down-trending stock chart or a decreasing
stock value.
Selling a
Call Option: When
you sell a call you receive a premium for the
purchaser to have the right to buy stock from you. If
the decision is made by the purchaser to exercise the
call option, you will have stock purchased from you at
the strike price written in the contract. The strategy
for selling a call option is a down-trending stock
chart or a decreasing stock value.
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