Free Investment Advice

Imagine somebody owns a piece of property which you really like, but do not have enough spare cash to purchase at short notice. There are various means available to you to raise the money, but they all need time to accomplish. So what can you do to prevent the owner from selling the property to another interested party?

Well, you can get him to offer you an option.

An option is a contract which conveys to its holder the right, but not the obligation, to buy the subject of interest stipulated in the contract.

So basically if the owner offers you an option, he is agreeing to let you hold the exclusive rights to purchase his property for a fixed price for a fixed amount of time. So if you manage to raise the necessary money within the stipulated duration, you would be able to purchase the property at the agreed price by exercising your option.

The owner of course does not offer the option for free. You will have to pay him a fee to secure the option. After all, you are preventing him from selling to other interested buyers for some time and he does bear some opportunity cost. The option fee is determined by factors such as the effective duration of the contract and exercise price.

If you choose not to exercise your option due to whatever reason, you will forfeit the option fee when the option expires.

In the context of the stock market, an option is a contract which conveys to its holder the right, but not the obligation, to buy or sell shares of the underlying security at a specified price on or before a given date. After this given date, the option expires and ceases to exist.

A call option is an option contract that gives the owner the right to buy the underlying security at a specified price for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.

A put option is an option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.

An option contract usually represents 100 shares of the underlying stock.

Strike Prices (or exercise prices) are the stated price per share for which the underlying security may be purchased or sold by the option holder upon exercise of the option contract.

Generally, at any given time a particular option can be bought with one of four expiration dates besides LEAPS ((Long-term Equity Anticipation Securities also known as long-dated options). Basically, LEAPS means calls and puts with expiration as long as thirty-nine months.

It is important to know that option holders do not enjoy the rights due stockholders – such as voting rights, regular cash or special dividends. This is because option holders own the option and not the actual shares of the company. A call holder must exercise the option and take ownership of the underlying shares to be eligible for these rights.

In conclusion, an option is a contract to secure the rights to purchase something for a stipulated amount within a stipulated timeframe. Options trading is an investment instrument that confers an option holder the right to buy or sell shares from the options seller at a stipulated amount within a stipulated timeframe. For many, options trading is a good leveraging instrument to make money off stocks they cannot afford. For others, options are a good way to protect their investments.