Chapter 2 - Basic principles of stock options. In this chapter we will discuss: What options are and where they come from, why options are a good idea, where and how options trade, components of the option premium, where profits and losses come from with options. | © 2004 South-Western Publishing Chapter 2 Basic Principles of Stock Options Outline What options are and where they come from Why options are a good idea Where and how options trade Components of the option premium Where profits and losses come from with options What Options Are and Where They Come From Call and put options Categories of options Standardized option characteristics Where options come from Opening and closing transactions The role of the options clearing corporation Call and Put Options Call Options A call option gives its owner the right to buy; it is not a promise to buy For example, a store holding an item for you for a fee is a call option Put Options A put option gives its owner the right to sell; it is not a promise to sell For example, a lifetime money back guarantee policy on items sold by a company is an embedded put option Categories of Options An American option gives its owner the right to exercise the option anytime prior to option expiration A European option may only be exercised at expiration Categories of Options (cont’d) Options giving the right to buy or sell shares of stock (stock options) are the best-known options An option contract is for 100 shares of stock The underlying asset of an index option is some market measure like the S&P 500 index Cash-settled Standardized Option Characteristics Expiration dates The Saturday following the third Friday of certain designated months for most options Striking price The predetermined transaction price, in multiples of $ or $5, depending on current stock price Underlying Security The security the option gives you the right to buy or sell Both puts and calls are based on 100 shares of the underlying security Standardized Option Characteristics (cont’d) The option premium is the amount you pay for the option Exchange-traded options are fungible For a given company, all options of the same type with the same expiration and striking price are identical | © 2004 South-Western Publishing Chapter 2 Basic Principles of Stock Options Outline What options are and where they come from Why options are a good idea Where and how options trade Components of the option premium Where profits and losses come from with options What Options Are and Where They Come From Call and put options Categories of options Standardized option characteristics Where options come from Opening and closing transactions The role of the options clearing corporation Call and Put Options Call Options A call option gives its owner the right to buy; it is not a promise to buy For example, a store holding an item for you for a fee is a call option Put Options A put option gives its owner the right to sell; it is not a promise to sell For example, a lifetime money back guarantee policy on items sold by a company is an embedded put option Categories of Options An American option gives its owner the right to exercise the option anytime prior to option .
