Options trading strike price
Long — This term can be pretty confusing. After you have purchased an option or a stock, you are considered "long" that security in your account. Short — Short is another one of those words you have to be careful about. But when you do, you may be obligated to do something at a later date. Read on to get a clearer picture of what that something might be for specific strategies.
Strike Price — The pre-agreed price per share at which stock may be bought or sold under the terms of an option contract. For put options, it means the stock price is below the strike price. This term might also remind you of a great song from the s that you can tap dance to whenever your option strategies go according to plan.
For put options, this means the stock price is above the strike price. Intrinsic Value — The amount an option is in-the-money. Obviously, only in-the-money options have intrinsic value. Time Value — The part of an option price that is based on its time to expiration. If an option has no intrinsic value i. Exercise — This occurs when the owner of an option invokes the right embedded in the option contract. Interestingly, options are a lot like most people, in that exercise is a fairly infrequent event.
See Cashing Out Your Options. That means he or she is required to buy or sell the underlying stock at the strike price. Equity Options — There are quite a few differences between options based on an index versus those based on equities, or stocks. Second, the last day to trade most index options is the Thursday before the third Friday of the expiration month. It might actually be the second Thursday if the month started on a Friday. But the last day to trade equity options is the third Friday of the expiration month.
There are several exceptions to these general guidelines about index options. See What is an Index Option? Stop-Loss Order - An order to sell a stock or option when it reaches a certain price the stop price. For standard put and call options the payoff to the option holder is relatively simple. Note that when talking about option payoffs it is convention to ignore the price of the option and consider only the amount of money the holder gets for holding the contract to maturity. The holder of a call option will only execute the option if, on maturity, the current price of the underlying asset is greater than the strike price.
If this is the case, the call holder can purchase shares at the strike price and sell shares at the market price, netting the difference as profit. In the case that the strike price is greater than the price of the underlying asset at the time of maturity, the call option is worthless - the holder would prefer to purchase the asset at the current market price and thus would not exercise the option.
The payoff of a plain-vanilla call option at maturity is,. The graph below shows the relationship between the payoff of a call option and the price of the underlying security at maturity.
The holder of a put option has the right but not the obligation to sell shares of the underlying asset at the strike price upon maturity. As such, it is only profitable for the holder to do so if they can sell the shares when the strike price is greater than the market price at maturity. The value of a put option at maturity is,. An option's value and payoff is directly related to the price and volatility of an underlying asset, as well as factors such as the proximity to the expiration date.
Options can be valued using different valuation methods including the popular Black-Scholes Model which uses many variables to calculate the estimated value of an option. When someone purchases 1 call option on a stock which expires in 1 year, the value of the option will increase as the underlying security rises in value.
At the same time, the option will slowly lose time value as time progresses and the option gets closer to the expiration date. Most options expire worthless at expiration becuase they are "out of the money. On the flip side, a put option is considered "out of the money" when the underlying stock price is trading above the strike price of the option.
From the makers of. Unable to complete your request. Please refresh your browser. See more recent news. In November , Ms Jaitley launches India's first agro options contract in guar seeds, says will benefit farmers.
Since January 3rd , firms involved in binary The trading will be officially launched by the Finance Minister in New Delhi. To start with, opt Robinhood is launching a free options trading product for its users. Robinhood, the zero-commission stock broker, has a new sophisticated investment product for its more than 3 million users. The Palo Alto-based company announced Wednesday it would offer free options trading.
An option is a financial product Options trading on Starbucks heats up. Fidessa group plc LSE: Judged by a panel of industry experts Suggest other news sources for this topic.
Related Articles What is a stock?