A call option is the right to buy shares at a predetermined price sometime in the future.
has some important features and terminology.
All options are derivatives. That is, they are derived from other underlying securities.
In this case, the underlying security is likely to be a stock, according to Apple (AAPL), or an index such as the S&P 500 (see below for details).
a call option It therefore gives the holder the right, but not the obligation, to purchase the underlying asset before the option expires.
Strike (or Strike) Price
This is the price at which the underlying asset can be purchased.
So, for example, if an AAPL call has a strike price of 200, the holder can purchase AAPL shares at this price any time before the option expires.
date of expiry
The date the call option expires. This means that the right to purchase shares is valid only until this date.
The cost of purchasing an option.
So, for example, a 3-month AAPL 200 call option (i.e. the holder can buy 100 AAPL shares at any time in the next 3 months) costs $15 per share (i.e. a total of $1500). There is a possibility.
Call option profit and loss chart
A put is the opposite of a call, giving the holder the right, but not the obligation, to sell the stock at a specified price in the future.
These have functions similar to calls.
A security that the put option holder has the right to sell.
The price at which the underlying asset can be sold in the future.
date of expiry
The period during which the holder must exercise (or use) the option before it expires.
The cost of purchasing the option.
Put Option Income Statement
Note that put holders do not have to own the stock before purchasing the put.
In-the-money, the holder only needs to sell the option on the open market just before expiration (see below).
Call and Put Options: Differences
The most important difference between call and put options is the rights granted to the contract owner.
When you buy a call option, you are buying the right to buy shares. strike price stated in the contract. You expect the stock price to rise above the option strike price. You can then buy the stock at a strike price below the current market price and sell it immediately for a profit.
When purchasing put option, you are purchasing the right to sell the shares at the strike price stated in the contract. You expect the price of the underlying stock to fall. If the price of the shares falls below the strike price, you can sell the shares at a price above the market price of the shares and make a profit.
Call and Put Options: Additional Terms and Considerations
So far, we’ve focused on option buyers.
But one of the attractions (and dangers) of options trading is that you can also be on the other side of the trade, as the so-called “writer” of the options contract.
The option creator receives an initial option premium at the time the option is created. So, for example, $1500 in his AAPL example above would be paid to the option writer (or sometimes called the seller).
One of the key concepts to understand is that the option P&L chart for the creator is an “upside down” version of the P&L for the purchaser.
in money / in money / without money
The options are said to be:
In-the-money if the strike price at that time is either lower or higher (call) than the current underlying price (call)
Out of the money if the strike price at that time is higher or lower (call) than the current price of the underlying (call)
at the money When the strike price and current price are the same (both call and put)
mini calls and puts
Generally, one option contract relates to 100 shares of the underlying asset.
So, for example, you can buy 100 AAPL shares with one AAPL call option.
However, in 2017, the CBOE launched a so-called Mini ETF for five high-trading underlying securities: Amazon (AMZN), Apple (AAPL), Google (GOOG), Gold ETF (GLD), and S&P 500 SPRD (SPY). Started options.
These options are designed for small retail investors and involve only 10 shares.
Whether this new product will be as popular as these products remains to be seen. Initial spread is slow.
Call parity setting
An important theoretical concept that more advanced options traders need to understand is put-call parity.
Since this is an introduction to options, I won’t go into too much detail on this, but the summary is that puts and calls aren’t as similar as you might think.
In fact, you can construct a put or call option by buying or selling a combination of puts, calls and stocks. So, for example, a put option sold is the same as a stock bought and a call sold.
And since they are the same if you know the call price, you can guess the put price (and vice versa).
Therefore, the call and put pricing are connected, connecting call put call parity. See Put Call Parity Explained for more information.
Options are not difficult to understand once you understand the basic concept of options. Options offer opportunities when used correctly, but can be detrimental when used incorrectly.
About the Author: Chris Young has a degree in Mathematics and 18 years of experience in finance. Chris is British, but he has worked in the US and most recently in Australia. His interest in options was first sparked by the “Trading Options” section of the Financial Times of London. He was determined to pass this knowledge on to a wider audience and in 2012 founded Epsilon He Option.
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