By Bayo
We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
Welcome to the world of options, and firstly you need to know both parties of options trading.
Option holder
The option holder also called the buyer, is the party who has a long position in the option and owns the right inherent in the contract.
However, the right doesn't last forever, as at some point the option will expire. At expiration, the owner may exercise the right or, if the option has no value to the holder, let it expire without exercising it.
Owning an option represents strictly the right either to buy the stock or to sell it, depending on whether it's a call or a put. It means you can not own some of the shareholder ownership rights, such as receiving dividends and having voting rights.
Option writer
The option writer also called the seller, is the party who has a short position and incurs an obligation to potentially either buy or sell the stock.
When a trader who is long an option exercises, a trader with a short position needs to fulfill its obligation that was established when the contract was sold.
Shorting an option is fundamentally different from shorting a stock. Shorting a stock must establishing a short position while in an option does not require borrowing.
Please stay with us for more on options basics!
Please stay with us for more on options basics!If there is anything that you didn't understand in today's Options Basics article, simply leave a comment below and we will try to explain more to you!
Comment(7)
good so far.
still don't understand
What part is confusing?
Yes, I get it. I like the diagrams.
thanks
Think of it like this, if you buy a call option: You are paying a premium to purchase Shares of a stock.
You are essentially Purchasing an insurance policy, Which in layman’s terms means someone promised to sell you shares of a stock at a specific price on a specific day if it is a call.
The specific price is called the strike price and that date is called the expiration day. You are the Option Holder bc it is your contract you Paid For. You are Paying a premium to get that insurance contract. Then, on the expiration date you Can go to the Seller or the contract (the writer) to Purchase 100shares if it Is a call or to sell 100 shares If it is a put. Also, the option writer is in a short Position bc they are the one who will be out of luck if you decide to exercise your contract on the expiration day. The option WrIter (or seller) will have to sell you shares on the expiration day if you purchased a call or they are required to buy your shares If you purchased a put. All in all you just Need to know that If You purchased a call, you want the stock price to be Above the strike price on expiration day. Last, if you Purchased a put, you want the stock price to be above the Strike price At expiration.
I hope this helps you. I tried to put this in layman’s terms as I found The concepts to be difficult When I was learning.
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