Options Trading Overview

Introduction

Expiration Date
- All options have an expiration date (could be soon or years away).
- Unlike stocks, which can be held indefinitely.
Strike Price
- The fixed price at which the option holder can buy (call) or sell (put) the underlying asset.
- Example: For a strike price of $105, you can buy/sell shares at this price regardless of current market price.
Option Contract Multiplier
- Options typically control 100 shares of the underlying stock.
- Example: An option priced at $5 requires $500 to purchase since you are controlling 100 shares.

Definition: Grants the right to buy 100 shares at the strike price before expiration.
Price Movement: Call prices increase when the stock price rises.
Example:
- Buying a call option on a house valued at $200,000 for $10,000 gives the right to purchase at that price for a set period.
- If the house appreciates to $350,000, exercising the option provides a profit of $150,000 (minus the premium).

Definition: Grants the right to sell 100 shares at the strike price before expiration.
Price Movement: Put prices increase when the stock price falls.
Example:
- Buying a put option allows selling a stock at a higher price than the market price, providing profit if the stock falls.

Call Option Example:
- Strike price: $800, current market price: $811.
- If stock price rises to $1,000, the option becomes valuable since you can buy at $800.
- Profit calculation involves subtracting the premium paid from the profit from the option.
Put Option Example:
- Strike price of $130 when stock price is $130.71.
- If the stock price falls below $130, the option gains value.

Intrinsic Value
- Actual value of the option based on the current stock price in relation to the strike price.
Extrinsic Value
- The additional value of an option, including time value and expected volatility.
- Higher time until expiration generally means higher extrinsic value.

Definition: Market's expectation of how much the stock price will fluctuate in the future.
Higher implied volatility leads to higher option premiums.
Example: A stock with more price fluctuations will have more expensive options.

Buying Options
- Risk involves losing the premium if the option expires without intrinsic value.
Shorting Options
- Selling options you don’t own, which can be risky due to potential losses if the stock price moves against your position.
Vertical Spreads
- Limited risk strategies involving buying and selling options at different strike prices.

Emphasis: Understanding options trading basics will aid in more complex strategies.
Encouragement: Keep learning about different strategies, especially vertical spreads and option Greeks.
Final thoughts: Observe market movements and practice with real trades to gain experience.