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

Related Articles
  1. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  2. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  3. Investing

    What are Options Contracts?

    An explanation of options contracts, call options and put options.
  4. Trading

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
  5. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  6. Trading

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  7. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
Frequently Asked Questions
  1. What are leading, lagging and coincident indicators?

    Leading indicators move ahead of the economic cycle, coincident indicators move with the economy, and lagging indicators ...
  2. What are the advantages and disadvantages of buying stocks instead of bonds?

    Learn more about how stocks and bonds differ dramatically in their structures, payouts, returns and risks and discover which ...
  3. What are the key differences between financial risk and business risk to a company?

    Understand the difference between a company's financial risk and its business risk, along with some of the factors that affect ...
  4. What caused the Stock Market Crash of 1929 that lead to the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression, sparking a nearly 90% loss ...
Trading Center