What Is Options Trading?

An option is a contract that gives its owner the right, but not the obligation, to buy or sell a particular stock or ETF, at a specific Strike price, over a specified time frame. Options contracts give the holder the right, but not the obligation, to buy or sell 100 shares of the underlying asset, at a preset strike price, at or before the expiration date of the contract, giving owners the right to buy or sell a given stock without having to pay up front for it at its current market price.

A call option gives the buyer of the option the right to purchase 100 shares at the strike price anytime up until the specified expiration date. In addition to call options, as described above, put options give the option buyer the right to sell 100 shares at a given price, protecting the option buyer against losses in their position or gains if stocks decline.

For example:
If you think that the stock price of a ticker will drop to $80, you could purchase a put option (giving you the right to sell shares) at a strike price greater than $80 (ideally, the strike price is at least as high as $80 plus the option value, so the option remains profitable at $80). If you believe that a company’s stock, which is currently trading for $100, is going to increase to $120 at some point in the future, you would buy a call option with a strike price below $120 (ideally a strike price no higher than $120 plus the cost of the option, so that the option remains profitable at $120). A lower strike price has more intrinsic value to the call options, because the options contract allows you to purchase a stock for less than the current trading price.

If you are buying a call option, that means that you expect that stock (or other security) will increase in value, so you can profit from your contract by exercising your rights to buy these shares (and typically selling them right away to cash in on the gain). An option is a contract that gives a buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (the strike price is the price that the option holder may exercise their option to buy or sell the underlying security, depending on). If you were to purchase a long put option for Microsoft, you would be betting that the prices of Microsoft stock will decline before your contract expires, such that, should you decide to exercise the right to sell these shares, you will sell them for more than their market value.

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