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.

---

The Cost of Green Eggs and Ham

Young readers know that March 4th is the birthday of... Read More

Investing Psychology Today Requires All Traders to Awaken Their Speculator Minds

Stock trading strategies are as rampant today, as they were... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Straddle Strategies in Option Trading

The straddle strategy is an option strategy that's based on... Read More

Keeping It Interesting

Some lines from a movie never leave your mind; I... Read More

Poll Names Coin Laundries Best Investment For 2005

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

Annuity Help

Many people today are looking for annuity help. The biggest... Read More

Focus Your Investments on the Long Term

"All human power is a compound of time and patience!"... Read More

Annuity Investment Guide

While there is not a lack of information on annuities,... Read More

College Savings Plans ? Are They The Best Choice For My Child?

College Savings Plans ? are they the best choice for... Read More

Your Portfolio and ?Old Ironsides?

The USS Constitution first ventured into the waters in 1798.... Read More

It Must Be Joe Cockers Market

Agonizing displays of poor theatrics failed to entertain my mind... Read More

How to Choose the Right Share Class

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

The Demise of Buy & Hold

Based on consistent results I think Buy & Hold should... Read More

Planning Starts with the Basics

When developing a plan for your finances, the toughest question... Read More

The Past Does Not Equal The Future: Mutual Fund Returns!

A way that investors get ripped off and in a... Read More

Well Managed Investing Risks Bring Rewards!

"Risk comes from not knowing what you're doing!" Warren Buffett... Read More

Have Analysts Gotten Honest?

It caught my attention when I heard an analyst on... Read More

Trading Tips No 3: Online Trading and Investing: Buy, Hold, and Hope

So you have learned how to trade the markets by... Read More

Investing In Sons Business Could Cause A Real Family Feud

Q: My youngest son wants to borrow $5,000 to start... Read More

Have You Ever Seen A Map of the World Turned Upside Down?

For those accustomed to viewing things a certain way, it... Read More

Who Wants To Be A Millionaire?

I am sure you have probably read about the power... Read More

Investing: The Art Of Making Your Money Work For You

There is a lot to know about investing. It all... Read More

Discipline in Trading and Investing

The one thing I can think of that most affects... Read More

Holy Grail Investments

Every year I go to the Money Show in Orlando,... Read More