Recap

Some quick facts about options

Contract

Options are quoted in per share prices, but only sold in 100 share lots. For example, a call option might be quoted at $2, but you would pay $200 because options are always sold in 100-share lots making it one contract.

Strike price

The Strike Price (or Exercise Price) is price the underlying security can be bought or sold for as detailed in the option contract.

How to identify an option

You identify options by the month they expire, whether they are a put or call option, and the strike price. For example, an “XYZ October100 Call” would be a call option on XYZ stock with a strike price of 100 that expires in October.

Expiration Date

The Expiration Date is the month in which the option expires. All options expire on the third Friday of the month unless that Friday is a holiday, then the options expire on Thursday.

Important!!!

This recap of options gives you an idea of what they are all about, but it is the tip of the iceberg. Do not trade options without understanding them completely as you could lose all. Consider a formal training or at least paper trade options before jump in.

This post is a deliberate reiteration of what we learned so far in-order to reinforce the basics of the options trading and make our learning journey begin on stronger foundation. The idea is to make the new comers and those who have been here before but felt it too much to digest the past posts, to feel at home. So, let’s have a recap on the past posts.

Option in stock market is basically a contract between two traders namely buyer and seller. An option gives; buyer a right and seller an obligation to fulfill the agreed contract.

Whenever, an option is traded, it just means that a contract has been made between a buyer and a seller either to buy or sell certain stock on or before a certain time period at an agreed price. The last date of “certain time period” mentioned in the last line is known as expiration date in options trading language.  Likewise, the “agreed price” is called strike price.

If you are a buyer of option you have the right to buy or sell the underlying stock any time before the expiration date. Similarly, if you are a seller of an option, then you have an obligation to sell or buy the underlying stock on or before the expiration date.

An option trade may be initiated for any of the available expiration dates. Usually most of the options will be listed for current month, following month, and couple of more with future expiration dates. In US markets third Friday of every month is the expiration date for that month options. Since, your option expires on the third Friday; you either trade out your option or exercise it.

There are two basic options called call and put which are either bought to: open or close or sold to: open or close resulting in 8 different combination of trades.

1. Buy to open a call
2. Buy to close a call
3. Sell to open a call
4. Sell to close a call
5. Buy to open a put
6. Buy to close a put 
7. Sell to open a put
8. Sell to close a put

Option contract usually means 100 shares. Whenever an option contract is traded it means 100 shares of the underlying stock are agreed to be either bought or sold between the buyer and seller.

Because options have finite life they lose their value quickly towards the fag end of their life or they rapidly lose their time value in the last weeks before their expiration in other words described as time decay.

According to the options industry council only 10% of the options contracts are exercised and 70% are closed out before the expiration and remaining 20% expire worthless.

There is a common saying in markets “I would rather be wrong and make money than right and lose” which is to say that it is more important to make money trading than making the right trades and still lose. But then your trading should not be based on some random thoughts. It is very important to have strict discipline in-order to make money trading and more importantly make money consistently. Consider a formal training or at-least paper trade before you can start real trading.

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