Stock Option
Stock options are commonly used by people who trade the stock market. It
gives them a chance to control shares of stock through an avenue other than
purchasing the stock. Options are less expensive, but have a specified
expiration date. Once the expiration date is reached, the options become
worthless.
A stock option is a contract between a buyer and seller that gives the buyer
the right, but not the obligation to buy the stock at a later date for a
specific price. They are sold through a clearing house which guarantees the
fulfillment of the contract. Most stock options are traded American style,
which means they can be exercised on any trading day before expiration. Some
are European style, which means they can only be exercised on expiration.
Stock options are sold in contracts. Each contract controls 100 shares of the
stock in question. You cannot buy an odd number of shares in a contract.
Thus, if you own one contract, you control 100 shares. You cannot control 55
shares of stock through an option.
Options are sold at a specific price points known as a strike price. The
seller guarantees to deliver the shares of stock bought through the option at
that price, regardless of the current market value.
Options are sold with a specific expiration date. It can be current month,
next month or up to a year in the future. All option contracts expire on the
third Friday of each month.
Traders who purchase a call option are hoping the value of the asset will
increase, which will make their option gain value. Traders who buy a call
option, but see the value of the stock decrease, will lose money on their
option.
Conversely, traders who purchase a put option are hoping the value of the
asset will decrease, which will make their option increase in value. Traders
who buy a put option will lose money when the underlying stock price goes up.
Types of Financial Options
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