Stock Option Definition

General characteristics of an option. Call Option Definition

Updated Sep 18, What is a Stock Option?

Options Trading Basics EXPLAINED (For Beginners)

A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or callswhich is a bet that a stock will rise.

The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price. A call option may be contrasted with a putwhich gives the holder the right to sell the underlying asset at a specified price on or before expiration. The specified price is known as the strike price and the specified time during which a sale is made is its expiration or time to maturity.

Key Takeaways Options give a trader the right to buy or sell a general characteristics of an option at an agreed-upon price and date. There are two types of options: Calls and Puts. One contract represents shares of the underlying stock. American options can be exercised at any time between the purchase and expiration date.

Characteristics of Listed Options

European options, which are less common, can only be exercised on the expiration date. Expiration Date Options do not only allow a trader to bet on a stock rising or falling but also enable the trader to choose a specific date when they expect the stock to rise or fall by.

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This is known as the expiration date. Strike Price The strike price determines whether an option should be exercised.

Notes 1. See Bates Computations involving the CDF of the GB2 and its special cases can be evaluated using programs for the incomplete beta and gamma functions. See McDonald and Bookstaber Milevsky and Posner use method of moments to estimate the parameters of a reciprocal gamma and price options.

It is the price that a trader expects the stock to be above or below by the expiration date. If a trader is betting that International Business Machine Corp.

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IBM will rise in the future, they might buy a call for a specific month and a particular strike price. Contracts Contracts represent the number of options a trader may be looking to buy. One contract is equal to shares of the underlying stock. Using the previous example, a trader decides to buy five call contracts.

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Premium The premium is determined by taking the price of the call and multiplying it by the number of contracts bought, then multiplying it by However, if a trader wanted to bet the stock would fall they would buy the puts. Trading Options Options can also be sold depending on the strategy a trader is using. Continuing with the example above, if a trader thinks IBM shares are poised to rise, they can buy the call, or they can also choose to sell or write the put.

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In this case, the seller of the put would not pay a premium, but would receive the premium. Compare Accounts.

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