Options trading has its own vernacular. This will also come in handy when you are reading Cabot Options Trader , my premium options advisory service. An option is a contract that allows you to buy call option or sell put option a certain amount of an underlying stock shares unless adjusted for a split or other corporate action at a specific price strike price for a set amount of time any time prior to its expiration.
A Call option gives the buyer the right to buy shares at a fixed price strike price before a specified date expiration date. Likewise, the seller writer of a call option is obligated to sell the stock at the strike price if the option is exercised. A Put option gives the buyer the right to sell shares at a fixed price strike price before a specified date expiration date.
Likewise, the seller writer of a put option is obligated to purchase the stock at the strike price if exercised. The strike price is the price per share at which the holder can purchase for Call options or sell for Put options the underlying stock.
Exercise is the process by which an option buyer holder invokes the terms of the option contract. If exercising, Calls will buy the underlying stock, while Put owners will sell the underlying stock under the terms set by the option contract.
All option contracts that are in-the-money i. The expiration date is the last day on which the option may be exercised. Monthly listed stock options cease trading on the third Friday of each month and expire the next day.
Weekly options cease trading on Friday of that week. Hedging is a conservative strategy used to reduce investment risk by implementing a transaction that offsets an existing position. A covered Call is a Call option that is written sold against an existing stock position. The intrinsic value of an option is the amount of profit that can be theoretically obtained if the option is exercised at that moment and the stock either purchased for calls or sold for puts at the current market price.
If an option is out-of-the-money i. The price of an option is called its premium. Because options have an expiration date, all options are wasting assets whose time value erodes to zero by expiration. This erosion is known as time decay.
Time value varies with the square root of time, so that as an option approaches its expiration date, the rate of time decay increases.
To be short an option means to have sold the option in an opening transaction. A short position is carried as a negative on a statement and must be purchased later to close out. These are long-term options with expiration dates as far out as three years, usually expiring in January. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. You must be logged in to post a comment. What is an Option? How to Hedge Portfolios with Options Once considered a niche segment of the investing world, options trading has now gone mainstream.
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