Possible Outcomes For an Option

Exercised

If the option is exercised, the buyer has elected to exercise their rights to buy or sell the stock depending on the type of option involved. Exercising an option obligates the seller to perform under the contract.

Sold

Most individual investors will elect to sell their rights to another investor rather than exercise their rights. The investor who buys the option from them will acquire all the rights of the original purchaser.

Expire

If the option expires, the buyer has elected not to exercise their right and the seller of the option is relieved of their obligation to perform.

Exercise Price

The exercise price is the price at which an option buyer may buy or sell the underlying stock depending on the type of option involved in the transaction. The exercise price is also known as the strike price.

Characteristics of All Options

All standardized option contracts are issued and their performance is guaranteed by the Options Clearing Corporation (The OCC). Standardized options trade on the exchanges such as the Chicago Board Options Exchange and the NYSE Alternext.

All option contracts are for one round lot of the underlying stock or 100 shares. To determine the amount that an investor either paid or received for the contract, take the premium and multiply it by 100. If an investor paid $4 for 1 KLM August 70 call, they paid $400 for the right to buy 100 shares of KLM at $70 per share until August. If another investor paid $2 for 1 JTJ May 50 put, they paid $200 for the right to sell 100 shares of JTJ at $50 until May.

Series 9 Exam Text Bank

OPTION PREMIUMS

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