STOCK OPTION BASICS

OPTION BASICS

There are stock options. In simple terms, an option is like a contract and for which you pay the premium. You can relate the options with coupons. For example, coupons are the offers, which can be used, while buying some products or services, and these coupons offer you certain amount of discount from the cost of the product or service. The coupons do have certain expiration dates, after which we cannot use them. The contracts in these stocks allow you to either sell your stock or buy the new stock. Before we think of using the options, let us know some basics about the options.

What is Option?

An option is a simple contract to buy or sell the stock. With the options, you can control 100 shares minimum and can have multiples of this number. The options are usually available in the batches of 100. So, when you have an option or contract, you will be able to control 100 shares with one contract. Just like a coupon, a contract, which is an option also has an expiration date. The expiration date of the option is different for different countries. For example in some of the countries, the options do expire on third Friday of the month. If you have the options for the longer period, then the options get expired on the third Friday of the expiration month.

How Does the Option Work?

Let us take an example of buying a house. Think that you want to buy a house in some specific area, where development is going on. Here, you don’t want to invest all your money as your anticipation of the development of the area, where you are purchasing the house become materialized or not. In these cases, you want to reserve an option to buy a house in this field. Then you want to the owner of the house and start making a deal. Let us say that you can purchase a house in that area with 200,000 dollars and you want to give 100 thousand dollars to the owner of the house and get an option to hold the house. The contract of owning the home without selling out to any other person or party is to be held for a particular period, like, say for one year. So, the property can be kept with you, though you made the partial payment. In the same ways, an option is also holding the stock property till the specified data and what we pay to keep is the premium.

The advantage of the option is that we can reserve the stock property, without paying off all the amount. The stock traders do take the options when they anticipate that certain company will do well shortly and thereby the profits can be more. Anyways,  there are many more things we need to explore, before jumping into trade with the options. So far, the basics of the options are just like contracts or coupons that we reserve to hold the property for a certain period, without actually buying the stock.

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