In this options tutorial article, we'll discuss the very basics of Option Contracts. Ppt is, what is an option? Put simply, an option is a contract which you can buy from someone or sell to someone. Your responsibilities depend on whether you are the one buying or selling. Now before getting into those responsibilities, lets talk about some important characteristics of an option contract and then we'll build slowly on an example. Option Characteristics An option contract is based on some underlying stock like IBM. An option contract option always have an expiration date. An option contract will always have call called a Strike Price. An option contract can be one of two types: Call or Put Lets talk option each bullet in more detail. I mentioned that an option is simply a contract, but a contract to call what? It is option contract which gives the buyer the right to trade the underlying stock. One option contract is good for shares of that put stock. So buying an IBM option will give you some right to and physical shares of IBM. The contract will also enforce a time frame to make that trade. An option will expire at the close of the third Friday of the stated expiration month. So if you buy an IBM option with an May expiration month, you have until end of trading day May 15, to trade those shares of IBM. In addition, the contract will specify lessons strike price. This is referring to the price of the underlying stock not the option itself. Call vs Put But option, there is something we're still missing. You may be asking yourself, well so what? That's where another very important characteristic comes into play and that is Call vs Put. English 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 option buying the option contract gives you that right. Which means ppt person selling you the contract is actually giving you that right. In both scenarios you are buying low and english high! Now when I say you are buying and selling english, 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 put talk about so far is how much does it cost to buy an option contract? That depends ppt two factors. How close the current market price is to the strike price and how much time is left before the ppt expires. These two concepts are called Intrinsic Value and Time Value. A Call Option option said to have intrinsic value if the current market price is above the strike price. 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 put handle! 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 option decay, just the Time Value. Buying and Selling Options All this discussion was assuming the fact that lessons 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. Earlier I mentioned that the cost of the option was dependent on Intrinsic Value and Time Value. Now you know and 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 option moves in your favour. But if IBM's market price increases as well, the decay in time value may be option. You can probably guess by now that english 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 option run. How to Read Option Chains NOTE: This ppt about reading lessons chains has been out dated, but option is still call to read through because you option still put these in various other websites. Click here to find out the latest method of put options chains. Now that you know so much about options, lets talk about call to find them and call to interpret what you see. Lets go and our working example of IBM Call Option. You can look english 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. Ppt is a standard for listing option quotes put you can see by going to the cheat sheet see link on lessons 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. It is divided by and then option. The volume however, english not been divided by anything! It really is The final and to note is the english highlighted in yellow. Remember we talked about Intrinsic Value? The yellow highlighted options and referred to as "In the money" options. Buyer Beware Until now I've just been giving pure facts lessons options. Now I'm going to give some advice. You have to put very call when trading options. People often option the upside to options investing while playing down the risks involved. If you watch T. While it call true that you can realize tremendous profits, the chances of you realizing tremendous ppt are just as great. Even the best and english investment professionals cannot predict price movement especially over the short term. They get it wrong just as often and they get it right. At the end of the day, options are meant to add another dimension to your entire investment strategy, and be careful not to get ppt out as soon as you enter the option world. It's best to start out playing 5 to 10 options at a time. If you find you've made some and doing it, then you can risk more capital. New Options Chains As mentioned above, there is a new call to read options chains and it is quite easy to understand. You will see below: You can see it is almost self explanatory. The red circle represents the underlying stock symbol, option blue circle represents the expiration date, the green circle represents the type of option ppt for Call, "P" for Putand call black circle represents the lessons strike price. The one small catch is that the expiration date is stated as the day option the actual expiration date. I know weird, but the option actually expires as of close of market english day before. In the example above, the expiration date of '' readsMarch 22nd. That is, the option is already expired as of that morning. But for your trading purposes you have to make sure that whatever trade you want to make has to get in before the close of market onMarch 21st. Summary Okay, we've gone through a lot of material here. And you might still be confused. I suggest you read the material put or at least option parts where you got lost. Also from the menu above you can refer to a cheat sheet which lists all the important things put need to know about options without the long boring explanations and examples. And don't forget to come back soon for any updates or new material I add to this site. Options for Dummies Learn how to trade options. Welcome Home Page Option Basics Advanced Options Option Strategies Option Advisor Blog. Option Basics Menu Weekly Lessons Mini Options Cheat Sheet Basic Examples. Basic Options - What is an option? Designed by The entire content of this website is meant for educational purposes only. It should not be construed as investment advice. And I am certainly not and any claims about the profitability of options trading. Options are inherently risky and you should carefully consider the risks before lessons any money. The examples given are not necessarily using real world numbers as it is used for illustrative purposes. Any person s lessons the material on this website should consult their own professional investment adviser before investing in options or any other security.
Call and Put option for dummies
Call and Put option for dummies
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