Stock Options Trading - Understand the Jargon

Trading stock options can be profitable but also risky. If you are interested in trading stock options, you must first learn the jargon and understand some of the basic concepts and terminology. It can be very lucrative if you trade the right way.

The basic concept in stock options trading is that investors purchase the right to either buy or sell a particular stock for a predetermined price within a specific time in the future.

Puts and Calls are the two main types of stock option contracts. A call option sets a time frame within which the holder has the right to buy the underlying stock at a specific price. A put option sets a time frame within which the holder of the option can sell the underlying stock at a specific price.

The selling price set by the option contract (calls or puts) is known as the "strike price". For instance, if your contract says you have the right to buy a particular share at $80 before expiry, then the strike price is $80.

An option is said to be "in the money" when the strike price is lower than the current market price of the stock.

An option is said to be "at-the-money" when the strike price is equal to the current price of the underlying stock.

An option is said to be "out of the money" when the strike price is higher than the current market price of the underlying stock. For example, if the strike price of an option contract is $95 and the current market price is $85, then it is said to be "out of the money" in this case.

The "intrinsic value" of an option is the difference between the current trading price of the underlying stock and the strike price of the option. "Extrinsic value" is the price of an option less its intrinsic value.

* Featured Articles:

Why Options Are Better Than Stocks

Advantages and Disadvantages of Options
0 comments: