Free Investment Advice

Before you enter the world of options trading, it is best that you understand what an option is.

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 ceases to exist. The seller of an option is, in turn, obligated to sell or buy the shares to (or from) the buyer of the option at the specified price upon the buyer’s request.

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.

The strike price - a fixed specification of an option contract - should not be confused with the premium, the price at which the contract trades, which fluctuates daily. Option strike prices are listed in increments of 2 ½, 5, or 10 points, depending on their price level.

Adjustments to an option contract’s size and/or strike price may be made to account for stock splits or mergers.

Generally, at any given time a particular option can be bought with one of four expiration dates plus LEAPS (take note of the expiration months shown above).

Option holders do not enjoy the rights due stockholders – e.g., voting rights, regular cash or special dividends, etc. A call holder must exercise the option and take ownership of underlying shares to be eligible for these rights.

Buyers and sellers in the exchange markets, where all trading is conducted in the competitive manner of an auction market, set option prices.