The Basic Concept of Options

To understand the basic concept of options, let’s start with a simplified look at how they work.

An (equity) option is linked to a specific stock. The price of the option is much less than the price of the underlying stock, which is a major reason for the attractiveness of options. If the price of the stock changes, the price of the option will also change, although by a smaller amount. As the price of a stock goes through its daily ups and downs, the price of an associated option will undergo related fluctuations.

The price of an option can be viewed and followed in much the same way as a stock price. There are numerous online services, including the data feed for your brokerage account, that provide the prices of ...

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