Stock Options

Overview

Stock options are public trade agreements made between an options holder and the owner of a stock. It helps to determine the control of the stock depending on the stock's trading price before option expiration. Stock options will have different values depending on the stock's price and the number of days before expiration date. Generally, stock options are traded based on the strike price and the month of expiration. The strike price determines the price upon which the option holder can take action. He can either buy or sell a stock at that price. The month refers to the time when the option expires. The specific time of expiration is when the market closes on the third Friday of that given month. Stock options allow investors to take risks with little investment, and depending on the strike price, they may also allow a cautious investor to lock in nice returns.

How It Works

A stock option is a contract that is agreed upon by a buyer and a seller. This stock option is based on the price of the underlying stock. There are two different types of stock options, a call, which is the right to buy a stock, and a put, which is the right to sell a stock. The options are bought and sold on the standard stock market exchanges. An aggressive investor will buy call options instead of buying a stock or buy put options instead of selling a stock.

Benefits

There are many benefits of stock options. For example, if you buy a put, you can choose to sell the stock at the sell price anytime before expiration. Also, if you feel that a stock's value will rise, you can buy a call for a fraction of the price of the stock. If the price of the stock rises before the expiration date, you will have a profit when you sell the stock options.

Cost/Pricing

The main cost you will incur is the amount you will pay for buying the stock options. Other expenses depend on the stock options you buy.

Timing

Stock option prices can be very volatile depending on the stock. The timing of your buying and selling of the stock options will often determine your level of success. When the market is more volatile, stock options will trade for higher premiums as compared to more stable times. Additionally, you might see stock option premiums rise in value before a company's earnings are announced, as this is a point of high uncertainty.

Companies/Industries

Nearly all large public companies and established stock indices have options available to be traded. ETrade, TDAmeritrade, Social Funds, Noble Trading, and OptionTradingpedia.com are some companies that enable you to do online stock option trading.