A stock option is a contract that gives the owner the right, but not the obligation, to buy or sell a particular stock at a fixed price (the strike price) for a specific period (until expiration). The contract also obligates the seller or writer to meet the terms of delivery if the owner exercises the contract right.
A call is an option contract that gives the owner the right to buy the underlying stock at a specified price (its strike price) for a certain, fixed period (until expiration). For example, an American-style XYZ Corp. July 60 call entitles the buyer to purchase 100 shares of XYZ Corp. common stock at $60 per share before the option’s July expiration date. For a call option writer or seller, the contract represents an obligation to sell the underlying stock if the option is assigned.
A put 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 (until expiration). For example, an XYZ Corp. July 60 put entitles the owner to sell 100 shares of XYZ Corp. common stock at $60 per share before the option’s July expiration. For the writer or seller 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 holder may exercise an American-style option any time before expiration. An option holder may exercise a European-style option only during a specified period before expiration. Currently, every European-style option is exercisable only on its expiration date.
All exchange-traded equity options are American-style. Most index options are European-style. Check each index option’s product specifications to verify the options exercise style.
LEAPS® or Long-term Equity AnticiPation Securities are options, both calls and puts, with expirations as far as two and one-half years in the future. Conventional options typically offer contracts with expirations up to nine months in the future.
Currently, equity LEAPS® have two series at any time with January expirations. For example, in November 2014, investors would see January 2016 and January 2017 LEAPS listed for eligible stocks and indexes.
There are several recommended initial steps to find a broker:
In the financial markets, an exchange refers to a securities exchange where members of the exchange trade stocks, options and/or futures contracts for their own accounts and the accounts of their customers.
These exchanges are registered with and regulated by the Securities and Exchange Commission (SEC). The current U.S. exchanges that list and trade equity, ETF and index options contracts are:
Known as The Characteristics and Risks of Standardized Options, this booklet briefly describes the characteristics of options and risks to investors of maintaining positions in options. There is an SEC rule that requires the U.S. options markets to prepare, and brokerage firms to distribute this booklet. Prior to buying or selling an option, investors must read a copy of this booklet.
The strike price is the price at which an option holder can purchase (call) or sell (put) the underlying stock, sometimes called striking price, strike or exercise price.
The last trade price may not reflect a recent trade. Although there will be a bid and an ask for options, they may not trade every minute, so trade prices posted as last trade may have occurred several hours, days or weeks ago. Therefore, many investors will use the option’s current quoted bid and ask price as a better indicator of the option’s current market value. This may offer a more accurate market valuation of any particular option.
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Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell ant option or any other security. Options involve risk and are not suitable for all investors