When it comes to investing your money to make a return, the stock market is a go-to method. It allows for many different types of options that you can utilize to achieve the wealth that you want. A popular method that those investing in the stock market utilize is options trading.
What Is Options Trading?
Before we can define just what options trading is, we need to first explain to you what options are. An option, in regards to the stock market, is defined as a contract that allows an investor to sell or buy a security at a predetermined price for a specified period of time. These options are bought or sold on the options market.
There are two main terms that you’ll need to understand when it comes to options trading. When you go to buy an option, then it’s referred to as a call option. If you go to sell an option, then it’s referred to as a put option. It’s important to note that options don’t give you ownership or stock in a particular security. It’s the exercise of an options agreement that allows you to get ownership.
What Is Exercising An Option?
As you learned above, an option is a contract that allows you the opportunity to buy or sell a security. Let’s say you purchased an option to buy 100 XYZ stock at say $5.00 per share for the next 30 days. On day 26, the price of the stock is up to $10.00 per share.
You can exercise your option to buy 100 shares of the XYZ stock at the $5.00 price instead of the market value of $10.00 per share. Executing your contract is called exercising in the options market. You’re not required to execute any options agreement that you enter into.
What Is The Strike Price?
When you enter into an options agreement, there are many specifics laid out. One of these agreed-upon terms is the strike price. The strike price is defined as the agreed-upon purchase price for the underlying security. If you have a call option, then the strike price is the price you agreed to buy the stock at. If you have a put option, then the strike price is the price that you agreed to sell the stock at.
What Is An Options Premium?
When you enter into these beginner options trading contracts, you’ll need to purchase them. The premium is the price that you pay for the options agreement. This changes daily and is a percentage of the overall value of the asset. The seller of options agreements will utilize both the current trading value and the strike price of the options contract to determine what its premium will be.
Most Contracts Are For 100 Shares
When you’re first starting in options trading, you must realize most contracts are sold in groups of 100 shares. So, if your contract is to buy a share at $5.00 apiece, you’ll actually be buying 100 shares that will cost you a total of $500.00. You should be very careful when first investing to ensure that you know just what your options contract states as there is a wide difference in paying for 100 shares compared to 1 share.
Understanding Stock Option Quotes
When you go to the options market, you’ll receive a stock option quote in a specific way. Understanding the components of the quote and how to read it is vital to your overall success in options trading. Let’s take a look at an example stock quote below.
You get a stock quote that shows the following:
XYZ December 1, 2019 70 Call AT $4.00
XYZ – This reveals that stock that the options agreement is for.
December 1, 2019 -This is the expiration date of the options agreement.
70 – This is the strike price for the contract.
Call – This indicates this option to be for buying securities.
$4.00 – This is the premium per share. Based on 100 shares for the option, that’s $400 for the contract.
Hopefully, you now have a better idea of what options trading is. Options trading is a great area to start as a beginner as it’s very simple to understand and allows you to invest with less risk than traditionally purchasing stocks.