Tag: What is the strike price

  • Stock Options Everything You Need to Know

    Stock Options Everything You Need to Know

    Stock Options
    The stock options give the holder the right, but not the obligation, to buy (or sell) 100 shares on or before the options expiration date.

    By Guy Avtalyon

    Stock options are financial instruments. That can provide the investor with the flexibility need in almost any investment situation.

    Stock options are contracts that convey to its holder the right, but not the obligation, to buy or sell shares of the underlying security at a specified price on or before a given date. After this specified date, the option stops to exist. The seller of an option is, in turn, obligated to sell (or buy) the shares to the buyer of the option at the specified price upon the buyer’s request.

    The stock options give the holder the right, but not the obligation, to purchase (or sell) 100 shares of a particular underlying stock at a specified strike price on or before the option’s expiration date. The seller of the option is one who grants this right.

    You can recognize two kinds of stock options: American and European. American options are different from European options. The European options permit the holder to exercise the option only on the date of expiry.

    How do stock options work?

    All options are derivative instruments. That means that their prices are derived from the price of another security. More precisely, the underlying stock price will determine the options price, it is derived from the stock price.

    As an example, let’s say you purchase a call option on shares of Intel (Nasdaq: INTC)  with a strike price of $40 and an expiration date of April 16. This option gives you the right to purchase 100 shares of Intel at a price of $40 on or before April 16th. Of course, the right to do this will only be valuable if Intel is trading above $40 per share at that point in time.

    Every stock option represents a contract between a buyer and a seller. The seller has the obligation to either buy or sell stock to the buyer. Of course, at a specified price by a specified date. The buyer, on the other hand, has the right but not the obligation, to execute the transaction. On or before a specified date. If it isn’t in the best interest of the buyer to exercise the option when it expires, the buyer has no further obligations. The buyer has bought the option to execute a transaction in the future. Hence the name – option.

    What is underlying security?

    The particular stock on which an option contract is based is usually known as the underlying security. Stock options are categorized as derivative securities because their value is derived in part from the value and characteristics of the underlying security. A stock option contract’s unit of trade represents the number of shares of underlying stock which are covered by that option. The stock options unit of trade is 100 shares. This indicates that one option contract signifies the right to buy or sell 100 shares of the underlying asset.

    What is the strike price?

    The strike price, or exercise price, of stock options, is the specified share price at which the shares of stock can be bought or sold by the holder, or buyer, of the option contract. To exercise your option is to exercise your right to buy or sell the underlying shares at the specified strike price of the option.

    The strike price for an option is initially set at a price that is reasonably close to the current share price of the underlying security.

    What is the stock options contract?

    A stock options contract is defined by the following elements: type (put or call), style (American, European and Capped), underlying security, a unit of trade (number of shares), strike price, and expiration date. All stock options contracts that are of the same type and style and cover the same underlying security are referred to as a class of options. All stock options of the same class are referred to as an option series. They have the same unit of trade at the same strike price and expiration date

    Stock vs stock options

    The difference between stocks and stock options is that stocks give you a small piece of ownership in the company, while stock options are contracts that give you the right to buy or sell the stock at a definite price by a particular date. There are always two sides to every option transaction: a buyer and a seller. For every call or put option bought, there is always someone else who is selling it. Many traders think of a position in stock options as a stock surrogate that has a higher leverage and less required capital. They can be used to bet on the direction of a stock’s price, just like the stock itself. But stock options have different characteristics than stocks.  And there is a lot of terminologies that options traders must learn.

    What are Put and Call?

    A call is the option to buy the underlying stock at a predetermined price by a predetermined date. The buyer has the right I explained above. The seller of the call who is also known as the call “writer” is the one who has the obligation. If the call buyer decides to buy, the call writer is obliged to sell shares to the call buyer at the strike price. A call option contract grants its holder the right to buy a certain but specified number of shares of the underlying stock. That right has to be executed at the settled strike price on or before the date of the expiry of the contract.

    For example, you bought a call option on ABC company with a strike price of $40, expiring in two months. That call buyer has the right to exercise that option, paying $40 per share, and receiving the shares. The writer of the call would have the obligation to deliver those shares and receive $40 for them.

    Put options are the options to sell the underlying stock at a predetermined strike price. Until a fixed expiry date. That put buyer has the right to sell shares at the strike price. And the put writer is obliged to buy at that price.

    Calls and puts, individual, or in combination, can provide different levels of leverage or protection to a portfolio.

    What are employee stock options?

    Many companies issue them for their employees. When used appropriately, these options can be worth a lot of money for you. With an employee stock options plan, you are offered the right to buy a specific number of shares of company stock.

    All employees’ options have a vesting date and the expiration date. It’s impossible to exercise these options before the vesting date or after the expiration date.
    You’ll recognize two types of stock options companies issue to employees:

    NQs – Non-Qualified Stock Options
    ISOs – Incentive Stock Options

    With a non-qualified type, taxes are taken from your gains after you exercise the options. However, keeping too much company stock is considered risky. For example, if the company has financial problems, your future financial security could be in danger.

    When long-term investors want to invest in a stock, they usually buy the stock at the current market price and pay full price for the stock. An alternative is to use stock options. Buying them allows you to leverage your purchases. Far more than is possible in even a margined stock purchase. In several investment situations, it might make sense to invest in stock options. Hence, rather than the underlying stock. Note,  the basic fact of stock options trading. You are highly leveraging your investment. And it means your investment risk is also substantially increased.

  • Market Dictionary And Jargon In Trading Options

    Market Dictionary And Jargon In Trading Options

    Market Dictionary And Jargon In Trading Options
    All the phrases that you’ll meet in the stock, Forex, and currency markets are explained. Especially for the options trading.

    By Guy Avtalyon

    Market dictionary and jargon can be confusing for people that just enter any market. Here you’ll find the meaning of most used terms. Each area has its own specific vocabulary and jargon.

    If you want to participate in the stock market, you should also know some basic terms and jargon.  In front of you is the short market dictionary and jargon. 

    Of course, in order to understand better what they are talking about. So, here you can find a Market dictionary with basic terms

    LONG – meaning in the market dictionary

    Describes a position (in stock and/or options) in which you have purchased and own that security in your brokerage account. Let me explain, if you have to buy the right to buy 100 shares of a stock, and are holding that right in your account, you are long a call contract.

    If you have to buy the right to sell 100 shares of a stock and are holding that right in your account, you are long a put contract. Say, you have purchased 1,000 shares of stock and are holding that stock in your brokerage account, or elsewhere, you are long 1,000 shares of stock.

    When you are long an option contract: you have the right to exercise that option at any time prior to its expiration and your potential loss is limited to the amount you paid for the options contract.

    SHORT   

    Describes a position in options in which you have written a contract (sold one that you did not own). In return, you now have the obligations in terms of that option contract.  If the owner exercises the option, you have an obligation to meet. And you have sold the right to buy 100 shares of stock to someone else, you are short a call contract.

    But, if you have sold the right to sell 100 shares of stock to someone else, you are short a put contract.

    What else our Market dictionary can say about this? When you write an option contract you are creating it. The writer collects and keeps the premium received from its initial sale.

    If you are short you are the writer of an option contract and you can be assigned an exercise notice at any time during the life of the option contract.  All option writers should be informed that assignment prior to expiration is a distinct possibility and your potential loss on a short call is theoretically unlimited.

    This means the risk of loss is limited by the fact that the stock cannot fall below zero in price. Although technically limited, this potential loss could still be very large if the underlying stock declines in price.

    OPEN –  meaning in the Market dictionary 

    The opening transaction is what adds to, or creates a new trading position. It can be a purchase or a sale.

    Opening purchase – a transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.

    Opening sale – a transaction in which the seller’s intention is to create or increase a short position in a given series of options

    CLOSE 

    A closing transaction is reducing or eliminating an existing position by an offsetting purchase or sale. The closing purchase is a transaction in which the purchaser’s intention is to reduce or eliminate a short position in the series of options.

    This transaction is known as “covering” a short position. The Closing sale is a transaction in which the seller’s intention is to lessen or eliminate a long position in the series of options.

    What are LEVERAGE AND RISK in the Market dictionary

    Options can provide leverage. That means an option buyer can pay a small premium for market exposure in relation to the contract value (usually 100 shares of the underlying stock).

    The investor may have a large percentage of gains from comparatively small, favorable percentage moves in the underlying equity. Leverage also has downside consequences.

    If the underlying stock price does not rise or fall as anticipated, leverage can increase the investment’s percentage loss.

    Options offer their owners a predetermined, set risk.

    But, if the owner’s options expire with no value, this loss can be the entire amount of the premium paid for the option. An uncovered option writer may have unlimited risk.

    What is the strike price

    In trading, options determine whether that contract is in-the-money, at-the-money, or out-of-the-money.

    Say the strike price of a call option is less than the current market price of the underlying security.

    Then say, the call means to be in-the-money. Because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stock market.

    If the strike price equals the current market price, the option is said to be at-the-money.

    What is Intrinsic value 

    It is the amount by which an option, call or put, is in-the-money at any given moment.
    By definition, an at-the-money or out-of-the-money option has no intrinsic value; the time value is the total option premium.
    This does not mean that you can get these options at no cost.

    The amount by which an option’s total premium exceeds intrinsic value is called the time value portion of the premium. It is the time value portion of an option’s premium that is affected by fluctuations in volatility, dividend amounts, interest rates, the motions in time.

    There are various factors that give options value and affecting the premium at which they are traded. Altogether, these factors determine time value. 

    These are certainly not the only so-called professional terms on the stock market. This Trading dictionary is just a collection of basic terms. Very soon you will have the opportunity to read the Great Trading

    Dictionary, that Traders Paradise is preparing for our readers. But they are some of the most common ones you will meet when you step into this world.

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