Basic Options Terms

Options are good investing and speculative instruments. But options terminology may confuse even experienced investors. In this article we will take up some basic options terms.

Option - A contract that grants the holder the right, but not the obligation, to buy or sell a particular security at a predetermined price for a set period of time. The seller of the option has an obligation to fulfill the terms of the contract in the event of exercise by the option buyer.

Call Option - A contract that gives the buyer the right, but not the obligation, to purchase a specified amount of underlying security at a strike price anytime before the contract expires (if it is American style option) or at expiration only (if it is European style option). The call option buyer hopes the price of the shares will rise by a specific date while the put option seller hopes that the price of the shares drop or remain stable by the specified date.

For example: I write a call option with 100 Microsoft shares, strike at $35 and expiration date in July. Now I have an obligation to fulfill the terms of the contract. I get some money for this contract and I hope that price will be no more then $35. But if you as option buyer exercise contract I must sell you 100 Microsoft shares at $35 for each.

Put Option - An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a strike price within a specified time. The put option buyer hopes the price of the shares will drop by a specific date while the put option seller hopes that the price of the shares rise or remain stable by the specified date.

For example: I write a putt option with 100 Microsoft shares, strike at $35 and expiration date in July. I get some money for this contract and I hope that price will be no less then $35. But if you as option buyer exercise contract I must buy from you 100 Microsoft shares at $35 for each.

Underlying Security - The stock, commodity, futures, or other financial instrument on which an option contract is based.

example: In previous examples underlying security is Microsoft stock.

Strike Price or Exercise Price - The price, specified by the option contract, at which the holder can buy or sell the underlying security.

Expiration Date - The date on which an option and all rights associated with it ceases to exist. Expiration Date is the last day on which an option may be exercised.

Expiration - The date and time after which an option may no longer be exercised.

Exercise ? Holder may to invoke the right associated with a particular option contract. When exercising a call option, the holder buys stock at a strike price from the option seller. In the case of a put, the holder of the option sells the stock to the option seller at the strike price.

Automatic Exercise - The automatic exercise of an in-the-money option at expiration by the clearing firm.

Premium - the total price of an option including both intrinsic and extrinsic or time value.

In-the-Money Option - A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security At-the-money - An option is at-the-money if the strike price is the same as the current market price of the underlying security.

Out-of-the-Money - An option with strike price is above (in the case of a call) or below (in the case of a put) the current market price of the underlying security.

Intrinsic Value - The portion of an option's price that can be account for by the amount the option is in-the-money. Intrinsic Value=Oprion price ? Time Value (for options is in-the-money)

Time Value or extrinsic value - The amount by which the current price of an option exceeds its intrinsic value. The price of out-of-the-money and at-the-money options is made up exclusively of extrinsic value

Options may be risky, but your can control and reduce risks. If you are newbie in options, buy some books, visit some seminars or online trainings before buy or sell your first option.

If you would like to find investment or trading courses, training or seminars, visit FPLab - Educational Resource For Traders and Investors Links catalogue.

---

Oil and Gasoline Price Uncertainties

The Light Crude Continuous Contract hit an all-time high at... Read More

Time is Money and We Are Running Out of Both!

One of the fundamental principles of finance is the concept... Read More

Begging Your Trust in Africa

The syntax is tortured, the grammar mutilated, but the message... Read More

Easily Finding A Good Stock

There is a tremendous amount of software, complicated high priced... Read More

Is Starting A Business For Me? What To Consider Before Starting A Business

Do you have the right temperament?Starting a small business is... Read More

Lobster Trapping for Investment Ideas

Recently, my family and I took a trip to Maine... Read More

Out-Of-State Investors Check List of Questions

The following lists of questions are suggested questions to ask... Read More

The Differences Betweeen the Wealthy and Everyone Else

I recently received an e-mail from a young lady who... Read More

Chile Leads the Latin Pack

Everyone's talking about China. Don't miss the opportunities in the... Read More

Rules of Simple IRA Your Business Needs to Know

A Savings Incentive Match Plan for Employees plan, better known... Read More

Protecting the Tax Advantage of Your Deferred Compensation

The American Jobs Creation Act of 2004 imposed strict new... Read More

The Biggest Oil Opportunity in the World ? And How You Can Profit From It

Where is the second biggest deposit of oil reserves in... Read More

Angels, Are They Real?

They're real, but few survive. High risk investing is dangerous... Read More

Landlording 101, Tricks of The Trade

Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for... Read More

Poll Names Coin Laundries Best Investment For 2005

According to Morton Pollack, CEO of PWS, The Laundry Company... Read More

Trading Commodity Futures Using Support and Resistance - Paper Trading

Setting Up a Paper Trading AccountQuestion: I cannot trade with... Read More

Investing As A Sport?

I said last week that money doesn't generally buy happiness,... Read More

Credit Scores = ROI Profits for Real Estate Investors

Strong credit saves real estate investors money on mortgage finance... Read More

Sitcom Investing

A fickle stock market encourages good-humored mockery.Recently, as I watched... Read More

5 Day Trading Tips for Success

1. How to Treat Gap Openings A gap up or... Read More

Margin Benefits are Marginal at Best

Margin is one of those things that novices find puzzling... Read More

How to Terror-Proof Your Money

"To drift is to be in hell, to be in... Read More

Six Principles of Successful Investing

1. Begin investing immediatelyProcrastination is the number one enemy of... Read More

How to Choose the Right Share Class

You'll want to opt for the no-load or institutional share... Read More

Critical Investors Business Daily Responsibilities - If not Followed Could Cost You Millions!

When thinking about the investors business daily responsibilities in today’s... Read More

Investing: Do You Want To Make Money, Or Would You Rather Fool Around?

It always amazes me how much stock market investors resemble... Read More

Tyranosaurus Rex

Everyone knows T Rex was the most fearsome of all... Read More

Guru Focused: Robert Olstein?s Short Sells

While it is rather rare that value gurus sell stocks... Read More

Stocks, Oil, and Bonds

A barrel of oil bounced to over $60 Thu, which... Read More

Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them

Computerized investing. Online investing. Have you taken the next step... Read More

Economic Survival in the 21st Century - the Three Key Questions to Ask

In this "special report", I want to pose a few... Read More

Why You Need To Buy and Sell Gold Coins (Part 5)

Grading coinsThe condition of a coin is commonly summarized by... Read More

Bad News - Why The Financial News Media Can Cost You Money!

The communication innovations we have around us today like the... Read More