We hope this tutorial has given you some insight into the world of options. Once again, we must emphasize that options aren't for all investors. Options are sophisticated trading tools that can be dangerous if you don't educate yourself before using them. Please use this tutorial as it was intended – as a starting point to learning more about options.
- An option is a contract giving the buyer the right but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date.
- Options are derivatives because they derive their value from an underlying asset.
- A call gives the holder the right to buy an asset at a certain price within a specific period of time.
- A put gives the holder the right to sell an asset at a certain price within a specific period of time.
- There are four types of participants in options markets: buyers of calls, sellers of calls, buyers of puts, and sellers of puts.
- Buyers are often referred to as holders and sellers are also referred to as writers.
- The price at which an underlying stock can be purchased or sold is called the strike price.
- The total cost of an option is called the premium, which is determined by factors including the stock price, strike price and time remaining until expiration.
- The premium of an option increases as the chances of the event of the option finishing in-the-money increases.
- A stock option contract typically represents 100 shares of the underlying stock.
- Investors use options both to speculate and hedge risk.
- Spreads and synthetic positions highlight the versatility of options contracts
- Employee stock options are different from listed options because they are a contract between the company and the holder. (Employee stock options do not involve any third parties.)
- The two main classifications of options are American and European. Options can also be distinguished as listed/OTC, or vanilla/exotic, among other classification schemes.
- Long term options are known as LEAPS.
- Options risks are defined by the greeks and allows options risks to be understood and evaluated.
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