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Learn About Stock Options Basics

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What Are The Stock Options Basics?

stock options basics

The stock options basics must begin with a reminder that options are securities just as much as stocks or bonds are. They differ in one crucial respect. Options are also contracts that give the holder the option to buy a specific asset for a certain price before a certain expiration date for the contract arrives. This option is not an obligation, as it is with futures.

In order to have an example of an option in terms of everyday, physical goods, consider that you want to buy a car. You agree with the present owner to give you the option of buying the car for $10,000 sometime during the next month, by which time you hope to have the money to do so. However, you must pay the owner $500 to acquire this option. You may let the option expire without acting on it at no penalty to yourself. However, you lose the fee paid to retain the option.

Apply this concept to stocks. Imagine that you pay for an option to buy a certain stock before a set date at an arranged price. Before the expiration date of the option arrives, the stock doubles in value. Now it makes sense to buy the stock at your prearranged lower price and sell it at the higher market value.

Stock Options Basics: Calls And Puts

There are two kinds of options. When holders pay for calls, they acquire the right to buy an asset at a specific time for an agreed-upon price. The holder of a call option hopes that the market price will increase before the expiration date so that he or she can buy the asset cheap and sell it at a higher price.

A put option guarantees the holder the right to sell an asset under the same set conditions. In this case, the option holder is hoping that the price will fall before the contract expires. The stock options basics also include special vocabulary used in options’ scenarios.

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