Options Made Easy

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What is an Option?

A Stock Option provides you the right, but not the obligation, to buy or sell shares of stock at a set price on or before a given date.  After this date, your contract expires and your option ceases to exist.

There are two types of options, which are CALL and PUT options.

A CALL option gives its holder the right to buy an underlying security (stock).  You buy a call when you think the stock is going up.

A PUT option gives the holder the right to sell an underlying security (stock). You buy a put when you think the stock is going down.

In simple terms, a Stock Option is a Contract where one party agrees to deliver stock shares to another party within a specific time period and price.

A stock option Contract grants you the right to buy or sell a stock.

Stock options are brought in Contracts. One stock option Contract =  100 shares of stock.  So when you buy 1 contract you are buying the right to buy or sell 100 shares of stock.

Strike Price, sometimes call the Exercise price is the specified share price at which the shares of stock can be brought by the buyer of a Call option, or sold by the buyer of a Put option.  Strike prices are standardized and are usually multiples of $1.00, $2.50, or $5.00.

For example, stock that is trading at a price of $103.88 a share will have options with strike prices of $95, $100, $105.

Expiration Date is the date an option no longer is valid and ceases to exist.  For stock options the expiration date can be up to nine months from the date the options are first listed for trading.  Longer-term option contracts called LEAPS can have expiration dates up to three years from the listing date.

Premium is basically the price of the option. This price is based on current price of the underlying stock, days left to expiration, interest rates, volatility, and dividends.

Option Chain is a listing of all the Puts and Calls option strike prices along with their premiums for a given maturity period.