Option Trading can provide a high leverage approach to trading that can significantly limit the overall risk of a trade or provide additional income.
Options cost less than the underlying instrument they represent and they are one of the most versatile trading instruments available for trading
There are two kinds of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset. It is essential to become familiar with the inner workings of both. Option buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock (or other underlying instrument) at a specified price until the 3rd Friday of their expiration month.
There are no margin requirements to purchase an option because risk is limited to the price of the option. In contrast, option sellers receive a credit for selling an option and get to keep this amount if the option expires worthless. However, option sellers also have an obligation to buy (put) or sell (call) the underlying instrument if their option is exercised by an assigned option holder. Because of this, selling an option requires a healthy margin.
The price at which an underlying stock can be purchased or sold if the option is exercised is called the strike price. Options are available in several strike prices above and below the current price of the underlying asset. Stocks priced below $25 per share usually have strike prices at 2 ½ dollar intervals. Stocks priced over $25 usually have strike prices at $5 dollar intervals.
The date the option expires is referred to as the expiration date. A stock option expires by close of business on the 3rd Friday of the expiration month. All listed options have options available for the current month and the next month as well as specific future months. Each stock has a corresponding cycle of months that they offer options. There are three fixed expiration cycles available. Each cycle has a four-month interval: a) January, April, July and October, b)February, May, August and November and c) March, June, September and December.
The price of 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. An option premium is priced on a per share basis. Each option on a stock corresponds to 100 shares. Therefore, if the premium of an option is priced at 3, the total premium for that option would be $300 (3 x 100 = $300). Buying an option creates a debit in the amount of the premium to the buyer's trading account. Selling an option creates a credit in the amount of the premium to the seller's trading account