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Stocks Options The Basics of Stocks Options Options are the most versatile trading instrument ever invented. Options generally cost less than stock but they provide a high leverage approach to trading which can significantly limit the overall risk of a trade or provide additional income. There are two types of options. The call option and the put option. Call Option gives the buyer of the option the right to buy the underlying asset( stock) at a specified price until the 3rd friday of the expiration month.
Similarly, put option gives the buyer of the option the right to sell the underlying asset (stock) at a specified price until the 3rd friday of the expiration month. Associated with the option are the strike price of the option and the premium of the option. The price of the an option is called the premium. An option's premium is determined by a number of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration and volatility. Typically speaking, the value of the option can thus be said to be comprising of two main values--- the time value and the intrinsic value.
The example here will give you a better picture of options, in a pretty simplified view. Consider a stock say Microsoft (symbol MSFT) which is currently trading at $34.34. Consider Option symbol MSQBG.X : MSFT 35 Feb Call @ $1.36.
Interpreting the above statement for this option, the strike price of this option is $35 and it is a call option trading at a premium of $1.36. Further analysis of the premium would reveal that ($35 - $34.34 = $0.66) this option has only time value which is $0.66. There is no intrinsic value for this option since the strike price of $35 is above the current price which is $34.34 of the stock. Buying this particular call option would give the buyer the right to buy 100 shares of MSFT at the price of $35 before the 3rd friday of Feb 08. In other words, should the shares of MSFT shoots up to say beyond $40, the buyer of this call option can then exercise his right to purchase 100 shares of MSFT at $35 and not at the then current price of MSFT which could be higher. For call option buyers, they are expecting the underlying stock to go higher. Similarly, for put option buyers, they are expecting the underlying stock to come down.
ITM , ATM, OTM Options: ITM refers to in-the-money options where the strike price of the options is below the current price of the underlying stock (for call option); or the strike price is above the current price of the underlying stock (for put option). ATM refers to at-the-money options where the strike price of the options is close to the current price of the underlying stock (for call or put option). OTM refers to out-of-the-money options where the strike price of the options is above the current price of the underlying stock (for call option); or the strike price is below the current price of the underlying stock (for put option).
Trading Platform: For me, I personally use www.optionsxpress.com for my covered call writing and find that it is a pretty reliable and well-equiped platform for stocks and options trading.
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