Stock Options
Stock options are actually the rights in order to sell or buy the stocks at a specified time. However stock option buyer or trader can take action on their option within the specified time. Taking action on the option is called exercising the option. Stock options have prescribed time limit within which an action can be taken on the options and if the time expires then the option trader can not take any action.
Stock options have various terms associated for buying and selling them. One is called the put option while the other is called the call option. The put option is actually for selling the stock while the call option is the option made to buy the underlying asset.
There are many people who are not acquainted with the above terms and this acquaintance is very necessary for you if you want to get into options trading. As a matter of fact, option trading revolves around these terms. If you are not good at picking them up then you can not really go for option trading. If you are still confused about the above terms then I have many examples to explain these terms so that you may be able to comprehend the concept easily and effectively.
In order to explain the call option, let us consider the call option given by Microsoft as
MSFT Jan09 $23.50 Call at $3
What does the above call option say? This says that option for 1 share of Microsoft can be bought at $23.50 before the third Friday of January 2009 at $3. This is as simple as that. Your mind might become upset about why a buyer should buy option before the third Friday? So the reason behind this is that options usually expire on the third Friday of every month and they become useless after this prescribed time because after this time, you would not be unable to take any action on the option.
Now the next concept is about the put option. Let us consider another example to clear any confusion regarding this option.
Let us consider that an investor wants to buy the put option from Microsoft which is listed at $40. However, if the current price of the option becomes $45 then the cost of the put would become $5 for the buyer. If the cost of the option remains below $40 then a buyer can take an action on his option and can sell it for more than $40. But if the price of the option remains above $40 then the buyer can not take any action on the option and he would have to suffer the loss of $5 in this option.
In other words, buying options is a good strategy in increasing the profit gains. However, options are usually bought along with the stocks because they are a good source of making investments and above all the chances of losses in these investments are also very less.
Options are traded on the various option exchanges. There are six option exchanges on the U.S. Market the options such American Stock Exchange and Chicago Boards Options Exchange. Stock options can indeed be helpful if you have bought the options of company at the time when its stocks are rising. However, if the stocks of that company start decreasing after some economic recession then you can sell those options at quite high rates because now you would be able to take action on the options. This can give you huge profit margin. So option trading is not a bad bet at all!
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