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Options Definitions: Open Interest
An option, when purchased, gives the buyer the right, but not the
obligation, to buy or sell a specific amount of a specific commodity at a
specific price within a specific period of time. By comparison, a futures
contract requires a buyer or seller to perform under the terms of the contract
if an open position is not offset before expiration.
The decision to
exercise the option is entirely that of the buyer.
The purchaser of the
option can lose no more than the initial amount of money invested (premium).
That is not the case, however, for the buyer of a futures contract.
An
option buyer is never subject to margin calls. This enables the purchaser to
maintain a market position, despite any adverse moves without putting up
additional funds.
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- Options give you the right to buy or sell a
security.
- If you a buyer you have the right to buy or sell
the underlying security at a specified price.
- An option seller you have the obligation before a
buyer.
- There are two type of options:
- calls - give you the right to buy the underlying
security.
- puts -� give you the right to sell the underlying
security.
- Each option corresponds to 100 shares of
underlying security.
- The price of options depend on several
factors:
- current price of the underlying security
- strike price of the option
- time remaining until expiration
- volatility.
- Strike Price. The price at which an
underlying security can be purchased or sold if the option is exercised.
- Expiration Date. The date the option
expires (3rd Friday of the expiration month). Each option has an expiration day
and after that date you lose your right to buy or sell the underlying security
at the specified price.
- Premium. The price of the options. If
option costs $3 then total premium is $300 (100 shares).
- Options are not available on every stock.
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