Options trading basics overview. Before we move on to Module 2 let's do a quick recap of Module 1.
Definition of Stock Options: If you buy or own a stock option contract it gives you the right, but not the obligation, to buy or sell shares of a stock at a set price on or before a give date (time period).
After this date, your contract expires and your option ceases to exist.
Derivatives are another name used for stock options.
Stock Options are contracts; they don't represent ownership in anything. They are merely contracts that grant you certain rights.
Options trading (the buying side) can be defined as buying contracts that you think will increase in value and once they increase in value you will sell them at a higher price and pocket the difference.
1 stock option contract = 100 shares of a company's stock. So when you buy 1 contract you are buying the right to, buy or sell, 100 shares of that stock.
The "Put option" gives its buyer the right, but not the obligation, to "sell" shares of a stock at a specified price on or before a given date.
The "Call option" gives its buyer the right, but not the obligation, to "buy" shares of a stock at a specified price on or before a given date.
For trading purposes, Puts and Calls expire the 3rd Friday of the month of expiration. For example if I bought a December option, it will cease to exist (expire worthless) after the 3rd Friday in December.
That's it for Module 1: Options Trading Basics. Before you leave don't forget to sign up for our option trading newsletter to get your free trading tips.
You can proceed to Module 2: stock option valuation whenever you feel you are ready.