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Tech
Entertainment
U.S. & World

What are Stock Options?

By on March 13, 2013

What are Stock Options?

Stock options are contracts guaranteeing a certain price for a specific security from the time that it was written until expiration.
For example, if I write a call option on 100 shares of IBM with a strike price of $200 with an expiration date of October 2013 that means that I am selling someone else the right to purchase 100 shares of IBM from me at that price regardless of what the price for IBM is from now until its expiration date. What this means is that if IBM is trading at $220 by or between now and October 2013 I would make a profit of $2000 by buying this contract ($20 that the shares appreciated multiplied by 100 shares).
Given that stock options are typically cheaper than just buying 100 shares of IBM they provide great leverage to the people trading them. It all comes with a risk though, if IBM were to instead trade below $200 by expiration your contract would then end up expiring worthless and you would lose your whole investment.

If you feel like a stock for which you own 100 shares of might start to move sideways one way to still get a small return on your investment would be to write stock options on it.

For more information on the different kinds of options please see our other articles:

Call Options Explanation in Detail
An article to explain in detail the function of Call Options.

Writing Call Options On Owned Stock
A great post on how to write stock options to benefit from sideways movements in a stock

The Difference Between Trading vs. Investing
Great article for when you start getting your hands dirty on the stock market.

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