How are Options and Stocks Different?
Students in an options education class will quickly learn the inherent differences in stocks and options.
Stocks trade in shares; options trade in contracts. Each contract controls 100 shares of stock. If you own nine contracts, you control 900 shares of stock.
Stocks don't expire; you own them until you sell them or they go out of business. Options are time sensitive and expire on the third Friday of the month. If you do not exit your option position before they expire, the options will expire worthless. The time factor is one of the most important things to consider when buying options.
Stocks trade in any dollar-and-cents increment; from $2.56 to $198.21. Options are sold at strike prices, specified increments that correspond to the stock price. For stocks selling between $5 and $25, the option strike prices are in increments of $2.50. For stocks selling between $25 and $200, the strike prices are in increments of $5. For stocks trading greater than $200, the strike prices move in increments of $10.
The prevailing method of trading stocks is to buy and hold. There are a multitude of option strategies that can be implemented depending on whether the stock market is going up, sliding down or trending sideways.
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