That's where another very important characteristic comes into play and that is Call vs Put.
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So which one do you choose? That depends on your personal belief on how IBM stock will behave. Remember that an option contract has an expiration date. In our example, it is May 15, Well then you want to buy a Put Option. To summarize, a Call Option gives you the right to buy low while a Put Option gives you the right to sell high.
Remember that buying the option contract gives you that right. Which means the person selling you the contract is actually giving you that right.
In both scenarios you are buying low and selling high! Now when I say you are buying and selling shares, it's not exactly correct. That's called an Option Assignment. And your brokerage firm will charge you a small fee for handling the nitty gritty transactions in the back end.
Option Premium The one thing we didn't talk about so far is how much does it cost to buy an option contract? That depends on two factors. How close the current market price is to the strike price and how much time is left before the option expires. These two concepts are called Intrinsic Value and Time Value.
A Call Option is said to have intrinsic value if the current market price is above the strike price.
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The rest of the option price is the Time Value. A quick side note about how option premiums are stated. When you see an option price quote, you will typically see the price divided by It's stated that way because one option controls shares. Don't be confused or mislead and buy more options than you can handle!
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For a Put Option, obviously the Intrinsic Value would be based on how much lower the market price is relative to the strike price. Time Decay An important factor to consider is the decay of time. The Intrinsic Value doesn't decay, just the Time Value. Buying and Selling Options All this discussion was assuming the fact that you would keep the option contract until expiration.
But the fact is you may not want to. In reality many people do not buy and hold the option that long. If they see an increase in the option they bought they will most likely sell the option and take their profit. Now you know that as time proceeds the decay in Time Value will decrease the value of your option. So the only way to make money is to hope that the underlying stock moves in your favour. But if IBM's market price increases as well, the decay in time value may be offset.
You can probably guess by now that the closer the market price is to the strike price, the more the option is worth. Now you can wait and see what happens on May 15th, but if you just wanted to take advantage of a short term price swing you can take your profits right now and run.
This section about reading options chains has been out dated, but it is still worthwhile to read through because you may still encounter these in various other websites. Click here to find out the latest method of reading options chains. Now that you know so much about options, lets talk about how to find them and how to interpret what you see.
You can look at the diagram below or go directly to Yahoo by opening another browser page and entering the URL http: As you can see there is a table like the one below: The red circle indicates this is for May The first column shows all the available strike prices. The green circle shows a weird looking symbol. It's certainly not the symbol for IBM, but it looks similar. There is a standard for listing option quotes which you can see by going to the cheat sheet see link on the right hand navigation.
You can probably figure out the rest of the circles if you've seen stock quotes. A couple of things to point out is the pricing standard and the highted area.
Options Trading For Dummies
It is divided by and then listed. The volume however, has not been divided by anything! It really is The final thing to note is the area highlighted in yellow. Remember we talked about Intrinsic Value? That's just the way the CBOE set it up. The last day they are available for trading is the day before they expire i. By the way, books like Options Trading For Dummies aren't bad if you want something to read when you're not online No need to remember all this; we'll show you all of the available choices in our tables; that's just the kind of top-notch firm we are.
There are tens of thousands of call options available with different combinations of stock, month, and strike price, but for some stocks, some months, and some strike prices, there are no options available.
Stock Option Basics
Another way to have options trading for dummies explained when you're done with this tutorial is to read through our covered call blog. Login Free Trial Free Newsletter. Let's look at some put and call option basics:
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