CHAPTER 1
Option Basics
Stock options are members of a large group of varied financial instruments known as derivatives; that is, options are derived or based on shares of common stock or stock indexes. Unlike stock certificates, where there is a fixed number at any given point in time, option contracts are actually created as they are needed in the marketplace. One of the figures you will see in the option price chain on your broker’s web site is “open interest,” the number of contracts for that particular option that are outstanding at that point in time.
DEFINITIONS OF CALLS AND PUTS
A call option is effectively a contract giving the owner of the option the right to purchase a fixed quantity of stock within a particular period of time and at a specified price, the strike price. An example would be a December $200 call option for Apple Computer. The owner of this option has the right to buy 100 shares of Apple Computer stock for $200 per share anytime up until the December expiration, the Saturday following the third Friday in December.
A put option gives its owner the right to sell a fixed quantity of stock within a particular period of time and at a specified price. Analogous to the call option example, the December $200 put option for Apple Computer gives the owner of this option the right to sell 100 shares of Apple Computer stock for $200 per share anytime up until December expiration.
ARE YOU LONG OR SHORT?
In both stock and options trading, we refer to being long when ...
