Options are exciting investment “vehicles,” but to be used profitably, you need to understand what they mean and what they can or cannot do for you. You have now scratched the surface of the option world.
You’ve now reached a level that gives you some ammunition and skills to play the basic options game. You have some valuable tools that give you the chance to win, too. This is a free starting point that most option traders use to calculate prices, click here for more information.
- Underlying Security – Is a stock or bond, (or other security) on which derivative instruments, such as futures, ETFs, and options, are based.
- Expiration Date – The date that the option expires, usually the 3rd Friday of the month in the U.S.
- Strike Price – The price at which the option contract can be executed.
- Exercising an option – When the holder of an option chooses to buy or sell at the price agreed in the contract.
- Call Option – The right, but not the obligation, to buy a stock at a certain price before the expiration date.
- Put Option – The right, but not the obligation, to sell a stock at a certain price before the expiration date.
- Covered Call – Writing/selling a call option on a stock that you currently own.
- Naked Call – Writing/selling a call option on a stock that you do NOT currently own.
- Time Decay – The reduction in an option price that occurs over time due to the reduced chance of a big price movement in the underlying stock.
- Volatility – implies the is more uncertainty and risk for a stock’s future price, therefore it’s more difficult to predict whether there will be gains or losses for this investment.
- Implied Volatility – a measurement of the market’s view of the likelihood of changes in a given security’s price, whether or not it’s real or perceived.
- Put Interest – the general market sentiment is that the stock price will go down, so there are more puts than call options.
- Call Interest – the general market sentiment is that the stock price will go up, so there are more calls than put options
- The Black-Scholes Model – The most generally accepted option pricing model.
In your virtual trading account:
- Buy a call option on a stock that you think is going to go up
- Buy a put option on a stock that you think is gong to go down
- Write an out-of-the-money covered call on a stock that you have in your portfolio and see if it expires worthless
- Buy a put on a stock that you have a profit on and try to lock in those profits