If you are interested in some basic options trading education, a good place to start is learning how to use put and call options.
Options contracts are a form of derivative, and you can use them to either manage risk or speculate in an effort to profit from changes in the market. Derivatives are contracts that can be used to either decrease (hedge) or increase risk (speculate), and options are some of the most basic of these financial instruments.
By purchasing an options contract, the buyer gains the right to either buy or sell an underlying security at a specific price within a certain time frame, according to The Options Guide. Whether or not the contract grants you the right to either purchase or sell the underling basis is based on whether or not it is a call or put option.
The price specified in the options contract is referred to as the strike price, the media outlet reports. If the owner holds a call option, the strike price indicates how much he will need to pay to purchase the underlying security. If the individual or entity instead owns a put option, this contract grants him the right to sell the security at the specified strike price.
The option holder has the right to buy or sell the underlying security at that price until a date referred to as the contract's expiration, according to The Options Guide. Once the expiration date has been reached, the owner of the option can no longer exercise the contract.
Stock options can fall within one of three expiration cycles, the media outlet reports. The January, April, July, and October cycle involves the first month of every quarter, the media outlet reports. A separate cycle consists of the second month of every quarter, and therefore includes February, May, August and November. The third and final cycle involves the third month of every quarter of the year, and as a result, contains March, June, September and December.
It is important to note that the expiration date for a contract will fall on the third Friday of the expiration month for all stock options that are listed on U.S. exchanges, according to the news source. In the event that this third Friday is a holiday, the expiration date will be pushed back one day to Thursday.
This is also called the exercise price, and gives the contract holder the option to purchase the underlying asset for this amount, The Options Guide reports. For both put and call options, there is a specific relationship between the strike price and the cost of the options contract.
In the case of the put options, the cost of the contract and the strike price are directly proportional, according to the news source. However, the exact opposite is true for call options, as the cost of the contract and the strike price are inversely related.
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