Explain Stocks
Explain Stocks
Basics of Stock Options Explained – Strike Price, Option Premium and Expiry Date
For a better understanding of the options trading, it is important to get basic elements of stock options explained in greater detail. Clear understanding of basic elements that build up the total option trading system is very important for realizing complex implementations of them. If you do not know exactly what strike price is or how options premium is charged, you might end up taking a wrong decision which may ruin your entire trade operation.
As you’ve already know, options are simply contracts of future purchase of stocks at a specific price, giving one party the right and another party the obligation to buy or sell some stocks in the future. This contract contains some specific parameters which are basics of options trading. Here, we will get these parameters of stock options explained one by one.
But before getting the basics of stock options explained, let’s take a look on the types of the options. There are two types, one is call option, which gives the owner of the contract the right to buy the stocks, and another is a put option which gives the owner of the contract the right to sell the stocks.
Now, the first element in an option is the strike price. It is the price in which both parties agree on selling or buying the stocks. This price is fixed when the option is issued and does not change with the change of the stock’s actual market price. Usually, for call options the strike price is set to a price little higher than the price of the stock during the time the option is written. For put options, it is set lower. But sometimes the strike price can be set to the equal value of the stock during the writing of the option. Owners of option have the right to, according to the type of option, buy or sell the stocks at the strike price, or let the option expire. Usually, strike price is defined per single stock, but the option itself comes for a bundle of 100 stocks. In that case the total strike price is 100 times the price defined in the contract and is for buying or selling 100s of the underlying stock.
The premium of the option is the price of the contract. It is not any part of the price for the underlying stocks. If the option is exercised, the amount of profit is determined by adjusting this premium with the difference of prices of the stock. If the option is not exercised, the premium is non-refundable and it is the gain to the option seller. The premium can be fixed price or can be monthly payments. Usually, the premiums are also mentioned for single stocks but are applied to a bulk of 100 stocks.
The last thing that defines an option is the expiry date. It is the date before which the option is to be exercised. If the option is not exercised before this date, the option holder loses the right defined in the contract and the option is rendered useless. Usually, expiry dates are only mentioned by month and in that case, the actual date is the third Friday of that month.
So, knowing every detail and characteristics of these above basic elements of options trading is the key to getting stock options explained at higher level. If you need more information on these topics, consulting licensed firms and brokers is a good idea along with searching for more information on the web.
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