Stock Options Trading
The Basics When it Comes to Stock Options What is a Stock Option? A stock option contract occurs when two entities agree to enter into a business transaction. One entity, who actually owns the stocks, will agree to sell them to another entity for a set price. The buyer has the ability to acquire the stocks, but is not required to do so if the stock price does not move in the direction that they anticipated. Each transaction is for a set period of time, and it involves 100 shares of stock.
Option Contract Stipulations
The terms discussed below are all stipulated in each option contract.
Strike Price – This is the price that will be paid to the owner of the stocks, if the buyer of the option, decides to go through with the transaction. The option premium is greatly affected by the actual price of the stock in relation to the market value of the asset.
Premium – In order for the buyer of the option to persuade the seller of the contract to allow them to have the right to purchase the stocks at some time in the future, a premium needs to be paid. The premium is based on many factures, some of which are the following; the time before the option expires, the strike price, and the volatility of both the individual stock, as well as the market on a whole.
Expiration Date – Each option contract always ends on a specified day, which is called the expiration date. After that date passes, the purchaser of the option no longer has the right to take possession of the stocks, and the option contract no longer has any value.
Each option contract specifies the month that it will end, and the day of that month is determined by what type of option it is. In the United States, options contracts expire on the third Friday of the month.
Option Class – Option classes are called “puts” and “calls”. A “put” provides the owner of the stocks the right to sell them. While a “call” provides the purchaser the right to buy the stocks at some time in the future.
The Options Market – This market is where “puts” and “calls” take place. A “holder” is the entity that buys the option contract. A “writer” is the seller of the option contract. Sellers are thought of as holding “short positions”, and buyers are considered to have “long positions”.
Underlying Asset – The stocks that are to be transferred if the purchaser of the option contract decides to buy them, are called underlying asset. When option contracts are engaged in for stocks, the underlying asset is a specific type of stock for a particular company that is listed on a public exchange. It is also possible to buy and sell other types of option contracts, and some of those are the following commodities, indices, and currencies.
Contract Multiplier – Each option contract contains a provision stating the quantity of the underlying assets that must be supplied if the transaction completed. Each stock option contact is one hundred shares of stock.
Option Style – There are two styles of option contracts, which are the American and the European style. An American style option contract can be exercised anytime the contract is still valid. A European style option contract can only be executed on the expiration date. Presently, all stock option contracts utilize the American style of contracts.