- Stock options give a trader the right, but not the obligation, to buy or sell shares of a certain stock at an agreed-upon price and date.
- Stock options are a common form of equity derivative.
- One equity options contract generally represents 100 shares of the underlying stock.
- There are two primary types of an options contract: calls and puts.
- Employee stock options are when a company effectively grants call options to certain employees.
Expiration Date
- Options do not only allow a trader to bet on a stock rising or falling but also enable the trader to choose a specific date when they expect the stock to rise or fall.
- The expiration date is important because it helps traders to price the value of the put and the call, which is known as the time value, and is used in various option pricing models.
Strike Price
- The strike price determines whether an option should be exercised.
- It is the price that a trader expects the stock to be above or below by the expiration date.
Call Option
Call options allow the holder to buy the asset at a stated price within a specific timeframe.
In a call option, the investor speculates that the underlying stock’s price will rise.
Put Option
Put options allow the holder to sell the asset at a stated price within a specific timeframe.
A put option takes a bearish position, where the investor bets that the underlying stock’s price will decline.