Purchasing an option gives the buyer the right, but not
the obligation, to buy or sell a specific amount of an underlying
security at a specific price within a specified time period. By
comparison, a futures contract requires both the buyer and the seller to
perform under the terms of the contract, if an open futures position is
not offset before expiration.
The decision whether or not to exercise an option is
entirely that of the options buyer.
An option buyer cannot lose more than the amount he or
she invested in the options premium. The same cannot be said, however,
for the buyer of a futures contract.
An option buyer is never subject to margin calls. This
enables the buyer to maintain a market position, despite any adverse
moves, without putting up additional funds.
Following are some further options basics:
- Buying an option gives you the right to buy or
sell an underlying security.
- As an options buyer, you have the right, but not an
obligation, to buy or sell an underlying security at a specified price.
- As an option seller (writer), you have obligations to
the options buyer.
- There are two types of options:
- Calls (call options) - give you the right to buy an
- Puts (put options) - give you the right to sell an
- Each option corresponds to 100 shares of an
- The price of an option depends on several factors:
- The current price of the underlying security;
- The strike price of the option;
- The amount of time remaining until the option
- The volatility of an underlying security.
- Strike Price. The price at which an underlying
security can be purchased or sold, if an option is to be exercised.
- Expiration Date. The date on which an option
expires. It is the 3rd Friday of the expiration month. Each option has
an expiration day. After expiry, you have lost the right to buy or sell
the underlying security at the strike price.
- Premium. The price of an option. If an option
costs $3 per contract, your total premium is $300 (one contract = 100
shares), plus commission (transaction) costs.
- Please note that options are not available on every
stock (i.e., not all stocks are optionable).
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