Things you need to know about options trading
Things you need to know about options trading

What is a call option?

Call options are financial contracts that give the owner the right, but not the obligation, to buy a stock at a pre-determined price within a specific time frame. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset appreciates.

What is a put option?

A put option is a contract giving the option buyer the right, but not the obligation, to sell a stock at a specified price within a specified time period. The specified price the put option owner can sell at is called the strike price.

What is the strike price?

A strike price is the specified price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is the price at which the security can be bought by the option owner; for put options, the strike price is where the security can be sold.

What Does Exercise Mean?

Exercise means to put into effect the right to buy or sell the underlying security specified in an options contract. The holder of an option has the right to buy or sell the option's underlying security at a pre-determined price on or before a specified date in the future.

If the owner of an option decides to buy or sell the underlying instrument—instead of letting the contract expire or closing out the position—the owner will be "exercising the option".

What Is an Option Premium?

An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to the Counterparty. Intrinsic and extrinsic value constitutes In-the-money option premiums. Out-of-the-money options' premiums is composed solely of extrinsic value. For stock options, the premium is quoted as a dollar amount per share, and a single contract covers 100 shares of the underlying stock.

What Is Time Value/Extrinsic Value?

The total premium of an option equals to its intrinsic value plus its option's time value. Time value means the portion of an option's premium that is attributable to the amount of time remaining until the expiring of the option contract. As the option nears expiration, time value decreases.Time value is also known as extrinsic value.

What is the Break-Even Price?

The break-even price is the stock price at which an investor can choose to exercise the contract without a loss incurred.

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