Tag Archive | "Stock Options Basics"

Learn About Stock Options Basics

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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Trading Penny Options

Trading Penny Options – What Is A Penny Option?

Trading Penny OptionsTrading penny options that derive their value based on the underlying value of a stock can be a powerful trading tool that stock market traders and investors can use to profit in the stock market from price action moves in stocks.  Trading penny options, as opposed to options that trade in nickel or dime increments, can also save stock market traders and investors a lot of money on their options trades.  If you do not understand how to trade options or how options work, it is a good idea to read Option Trading Basics and Trading Call Options before proceeding with this article on trading penny options.

Penny options are technically known as Penny Priced Options (PPOs) on Wall Street.  Traditionally, options on stocks have traded in nickel or dime increments, which is the spread between an option’s bid and ask.  While nickels and dimes might not sound like a big spread, options traded with penny spreads can offer substantial savings for stock market traders and investors that trade options.  Trading options priced in penny increments offers a 80% savings over options priced in nickel increments and a 90% savings over options priced in dime increments.  These savings add up when options are traded regularly, and can increase options trading profits for successful options traders.

Trading options priced in penny increments provides traders and investors an additional advantage since it reduces the price that a holder of an option needs the underlying stock to reach to make money on an options trade before the option expires.  This is because of the reduction in price that the penny option was brought at and the higher price that the penny option can be sold for upon completion of the trade reduces the break-even level for a stock option trade.

Trading Penny Options Is Limited

Trading options in penny increments started as a pilot program in 2007 that only included options associated with thirteen stocks.  Since then, trading penny options has expanded to options associated with many additional well known stocks, but penny increment options still do not include all of the stock options that trade.  To facilitate trading penny options, many online brokers now offer options trading in penny increments.

Those who wish to start trading penny options as part of their investing and trading strategies are encouraged to learn which stock options can be traded in penny increments and learn about the options market and the various ways options can be traded.

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Stock Options Basics You Should Know


stock options basics

The current state of the economy has made some investors wary about putting capital into market speculation, but a few stock options basics are all that is necessary to keep your portfolio healthy and productive. Stocks, like any other investment, are calculated risks, with the tendency to change drastically in both the short and long term. This makes many people nervous about committing their savings, especially when brokers employ confusing terminologies and complex mathematical formula in order to describe the performance of stocks.

Do you know why stock options basics are different from bonds and surety investments? Guaranteed increases, from Treasury Bills or Certificates of Deposit, will see the value of your money grow. This growth is quite small, however, with five percent yields topping the charts. Furthermore, you are not able to manipulate the investment. Investing in options, however, makes your money more fluid, as options are exactly what they sound like. They are an optional form of investment rather than an obligation, allowing you to withdraw or increase your stakes with nothing more than the push of a button.


Imagine you have just agreed upon an option to purchase an amusement park for a thousand dollars. The best case scenario is a success that makes millions each year in profit. The worst case is that the rides break and the park will lose money. As you have not purchased the park, only an option, you can wait to see which plays out. Should it be positive, you can cash in: should it be negative, you cut your losses. The most aspect of all stock options basics is the perceived value of an option, giving the investor the chance to hedge their bets in speculative ventures without running the risk of complete failure.

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