Professional Documents
Culture Documents
WhyOptionsHouse
Rates
TradingTechnology
NewCustomers
LaunchOptionsHouse
OpenanAccount
OptionshouseBlog
PostedbySteveClaussenonMay15,2015
Options101ForStockTraders
BlogCategories
WhyOptions?
All
M arketCommentary
PlatformFeatures
TradingStrategies
IfyouareanestablishedstocktraderbuthavediscoveredOptionsHouse,youobviouslyare
interestedinlearningmoreaboutoptions.Maybeyouaretiredoflisteningtoyourneighborboast
overcocktailsattheblockpartyabouthowheiskillingittradingoptionsandyouwantinonthe
action.Betteryetmaybeyourmotivationisadesiretoexpandyouroveralltradingskills,using
thesesecuritiestocontrolandmanagetherisksinyourstockportfolio.Youarenotalone.Options
tradinghasexperiencedphenomenalgrowthinthepastdecade,andyetitisstillanareawithinthe
investmentcommunitywhichismisunderstoodandtherebyunderutilized.Socongratulationstoyou
foryourinterestinlearningmore,youarewayaheadoftheinvestingmasses.
BelowisachartoftheannualnumberofoptionscontractstradedintheUnitedStatessincetheir
originallistingontheChicagoBoardOptionsExchange(CBOE)waybackin1973.
Notetheexplosivegrowthsincethemillenniumwiththeexpansionofelectronictrading.Thisnew
tradingtechnology,alongwiththecreationoflowcost,selfdirectedonlineretailbrokerssuchas
OptionsHouse,hasreallyleveledtheplayingfieldforretailinvestorslikeyoutoparticipateand
becomeacriticalmemberoftheoptiontradingmarketplace.
Whyhaveweseenthisimpressivegrowthofoptionstrading?Theyareversatile,financial
instrumentswhichcanbeusedtocreateawiderangeofinvestmentstrategies.Acoupleof
examples:
Optionsmaybeusedtogenerateincomeonstockyoualreadyowninyourportfolio.
Optionsallowownerstoparticipateintheupsanddownsofastockspricewithoutactually
owningthestock.
Optionscanreducethedownsidelossexposurefromamarketselloff.
Itisimportanttorememberthatnothingcomesfreewhenusingoptions.Therearecosts
associatedwithowningoptionsandrisks(whichmaybemuchgreaterthanthepremiumreceived)
associatedwithsellingoptioncontracts.Optionsinvolveriskandarenotsuitableforeveryinvestor.
Priortobuyingorsellinganoption,everybrokerrequiresinvestorstoreadacopyoftheOptions
DisclosureDocument(ODD).Butlearningtheproperuseofoptionsinyouroverallportfoliocan
provideyouwithmoreinvestmentoptionsthansimplybuyingstockandhopingthepricerises.
WhatareOptions?
Optionsarealsoknownasderivativesorderivativeinstruments.Thiscomesfromthefactthatthey
derivetheirvaluefromanotherunderlyingasset.Equityoptionsderivetheirvaluefromthe
underlyingequity(stock)price.Theyaresecuritiesjustlikestockandassuchregulatedintheir
transactionsbytheSecuritiesandExchangeCommission(SEC).Likestockshares,theycanbe
boughtorsold.Unlikestockshares,optionsarecontracts.
Likealegalcontract,theygiverightstotheowner(holder)ofthecontractinexchangefora
premiumpaid.Sellers(writers)ofoptioncontractsreceivethispremiumpaymentinexchangefor
havinganobligationtofulfillthecontractsterms.
Speakingofterms,thereareseveraltermstobecomefamiliarinordertounderstandoptions.
Therearetwotypesofoptioncontracts.Calloptionsandputoptions.
Buyingacalloptiongivestheowner/holdertherightbutnottheobligationtobuytheunderlying
stockatapredeterminedpriceanytimeonorbeforethecontractsexpirationdate.
Sellingacalloptionobligatestheseller/writertosellthestockatapredeterminedpriceanytimeon
orbeforethecontactsexpirationdate.Noticethesellerisobligatedtofulfillthecontracttheholder
hasalltherightstochoosewhethertoexercisetheirpurchasedrights.Theownerofthecalloption
literallyhastherighttoCALLthestockfromtheseller.Thusthenamecalloption.
Ontheputside,theowneroftheputoptionhastherightbutnottheobligationtosellthe
underlyingstockatapredeterminedpriceanytimebeforethecontractexpires.
Sellersofputshavetheobligationtobuythestockatapredeterminedpriceanytimebeforethe
contactexpires.TheowneroftheputoptionliterallyhastherighttoPUTthestocktotheseller.
Thepredeterminedpriceiscalledtheoptionsstrikeprice.Thisisthespecificpriceatwhichthe
optioncontractmaybeexercisedoractedupon.Anoptionsstrikepricerelativetotheunderlying
stockspricedeterminesiftheoptionhasanyrealorintrinsicvalue.Acalloptionwithastrikeprice
lowerthanthestockpricehasintrinsicvalueandisconsideredinthemoney(ITM).Aputoptionwith
astrikepricehigherthanthestockpricehasintrinsicvalueandisconsideredinthemoney.Ifan
optionhasnorealorintrinsicvalueitisconsideredoutofthemoney(OTM).
E.G.Acalloptiononastockwhoselastpriceis52withastrikepriceof45has7dollarsof
real,intrinsicvalue.Therighttobuystockatapriceof45is7dollarsbetterthanbuyingitat
52inthemarket.ThiscallsstrikepriceisITM.
Aputoptionwithastrikepriceof50dollarshasnorealbenefitwiththecurrentstockpricedat
52.Therighttosellthestockat50isnotbetterthansimplysellingthestockinthemarketat
52.ItisanOTMstrikepricefortheput.
Thesecontractsalsohaveanexpirationdate,thedayafterwhichtheoptionexpiresandliterallyno
longerexists.Theholderoftheoptionhastodeterminewhattodowithhiscontractbeforethe
optionexpires.Theycanalwaysselltheirrights(longoptioncontracts)toanotherbuyeratanytime
duringtheoptionsterm,theycanexercisetheirrightsandactuallybuyorselltheunderlyingstock,
ortheycanwalkawayandallowtheircontracttoexpireworthlessiftheoptionisoutofthemoney.
Asawriterofanoption,youhavenocontroloverwhetherornotacontractisexercised.Youare
potentiallyobligatedtofulfillthetermsofthecontractatanytimebeforeexpiration.However,likea
holderofanoption,thewritercanpurchaseanoffsettingcontracttoclosetheobligation.You
simplybuytoclosethesameoptionyouwereshort,fromanotherseller.
Inthetablebelow,youshouldlearnitbackwardsandforwardstoinstinctivelyunderstandwhich
rightsandobligationsyouhave.
Alternatively,lookingatthefourpossibiltiesorcornerstonesofbuyingorsellingputsorbuyingor
sellingcallsyoucanthinkofwhatmarketsentimentyoumaybeexpressingbymemorizingthis
chart.Bullishsentiment,expectingfuturepricestoheadhigher,orbearishsentiment,the
expectationoflowerpricesahead.
Thekeytakeawayfromthisintroductionwastopresentthedefinitionsandtermsusedinoptions
trading.Infuturearticles,wewilldiscusshowtoactuallyusetheselearnings.
Share
Ifyouenjoyedthispost,makesureyousubscribetomyRSSfeed!
RelatedPosts
Options102ForStockTraders
TheMarketMechanicallyDriven
TheMarketAnecdotalTrends
TheMarketShortTermOverExtension
TheMarketNewYear,OldIssues
Tags
None
ReferandEarn
AboutOptionsHouse
CustomerService
Resources
Security
AboutUs
Awards
Careers
AffiliateProgram
FAQs
LiveHelp
CustomerForms
ApplicationHelp
ContactUs
OptionsHouseBlog
Webinars
M argins&BuyingPower
TaxCenter
Promotions
InternationalAccounts
SecurityPractices
RiskStatements&Disclosures
PrivacyPolicy
Terms&Conditions
OMSecurities,LLCandOptionsHouse,LLC,asseparatebutaffiliatedcompanies,recentlyjoinedforcestobringtogetherthebestofeachcompany.OMSecurities,LLC,formerlydoingbusinessastradeMONSTER,isnowdoing
businessasOptionsHouse.
OptionsHousedoesnotprovideinvestment,taxorlegaladvice.Optionsandfuturestransactionsinvolveriskandarenotsuitableforallinvestors.Electronictradingposesuniquerisktoinvestors.Systemresponseandaccesstimes
mayvaryduetomarketconditions,systemperformanceandotherfactors.RefertoCharacteristicsandRisksofStandardizedOptions|RiskDisclosureStatementforFuturesandOptions|RiskStatementsandDisclosures|Privacy
Policy|Terms&Conditions,copiesofwhichcanalsobeobtainedbycontactingourCustomerServiceDepartmentat18775983190orcustomerservice@optionshouse.com.Aninvestorshouldunderstandtheseandadditionalrisks
beforetrading.
2015ApertureGroup,LLC.Copyrights,logosandtrademarksarepropertyofApertureGroup,LLCoritssubsidiaries.Allrightsreserved.Usedwithpermission.SecuritiesandfuturesofferedthroughOMSecurities,LLCd/b/a
"OptionsHouse.MemberFINRA|SIPC|NFA.Contactus