When people have extra money they want to invest, they can do so by buying stock options. We hope this article provided you with the basics of how stock options work.
First, what are stock options?
That is an agreement between two parties. This contract gives the buyer the right to buy or sell shares at a certain price. The buyer can exercise this right until the agreed expiry date.
It is he who gives the buyer the right to buy a stock called “call”. An option that gives the buyer the right to sell a stock is called a put option. These options can be used at any time until the expiration date.
Stock options typically have a block of 100 shares. A group of 100 people is called a “lot”. The price at which lots are bought or sold is called the “strike price”.
Here is an example of a stock put option:
Suppose you want to buy Rami Corporation stock options. Let's say the stock price is $210. So, you buy an option to buy 1 stock (equivalent to 100 shares) with an exercise price of 200 USD. And let's say that option expires in six months.
If Rami Corporation's stock price falls to $190 before six-month expiration, you can exercise the right to sell the option, equivalent to 100 shares of Rami Corporation with an initial strike price of $200. You can do this any time before the expiration date.
That is, when Rami's stock price is $190 per share, you can buy 100 shares for $190 and sell them for $200 per share. So you made $10 profit per share, even though the stock price was down.
Now here's an example of a stock option.
Let's use Rami's example above, except you buy the $200 call option. Suppose the stock price increases to 300 USD this time. Now what you can do is exercise the option to buy 100 Rami shares at $200 and then sell it for $300!
Things to remember:
If you buy a Call option and the stock price never rises above the strike price, the option will be worthless at its expiration date. And of course, this applies to put options: If the stock price never falls below the strike price, the option will be worthless at expiration.
And of course there is the cost of the choice itself. This is called the “premium” option.
There are many places to learn about stock options. You should visit different websites online that discuss stock and options trading before getting too involved. And be sure not to spend money you can't afford to lose. good luck!
