Lesson 3: Stock Options
What is Options Trading?
Buying and selling options is done on the options market, which trades contracts based on securities. Buying an option that allows you to buy shares at a later time is called a "call option," whereas buying an option that allows you to sell shares at a later time is called a "put option." However, options are not the same thing as stocks because they do not represent ownership in a company. And, although futures use contracts just like options do, options are considered a lower risk due to the fact that you can withdraw (or walk away from) an options contract at any point. The price of the option (it's premium) is thus a percentage of the underlying asset or security Feel free to click the link below to read the read about Option Basics.
by Anne Sanders
Options vs Stocks
One important difference between stocks and options is that stocks give you a small piece of ownership in a company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date.
Options give a buyer the right, but not the obligation, to buy (call) or sell (put) the underlying stock at a pre-set price called the strike price.
Options have a cost associated with them, called a premium, and expiration date.
A call option is profitable when the strike price is below the stock's market price since the trader can buy the stock at a lower price.
A put option is profitable when the strike is higher than the stock's market price since the trader can sell the stock at a higher price.