Options are financial instruments that are bought and sold in the largest markets in the world. Options are derivatives which is different from other financial instruments. When you buy or sell a stock, you own a small share of a company. However, an option is not a direct interest in something, but rather an agreement between two parties regarding a financial instrument. OptionEm provides you with the best research and recommendations for options on these stocks, exchange traded funds (ETFs) and indices.
Options are essentially a contract between a buyer and a seller. Each party has different rights and duties under this contract.
The buyer of an option has the right but not the obligation to buy or sell the underlying financial instrument at a certain price on or before a certain date.
Conversely, the seller of an option has the obligation to buy or sell the underlying instrument to a buyer at a certain price on or before a certain date.
Options contracts are then bilateral; there are always two parties and each has reciprocal obligations to the other. If one side has to buy, the other side must have to sell. It’s important to keep this in mind as you go through this tutorial.
Like any contract, the underlying terms of each option vary.
For instance, the underlying instrument is different for each option. You can buy or sell an option on most stocks and ETFs that are publicly traded. For example, you can buy or sell an option on a stock like Apple ($AAPL) or Google ($GOOG). You can buy or sell options on ETFs that track large indices like the S&P 500 ($SPY) or the Nasdaq ($QQQ).
Another term that varies on each option is the strike price. The strike price is the agreed upon price to buy or sell the underlying instrument. For example, you might buy an option on $AAPL that gives you the right to purchase the stock for $200 per share. The strike price in this example is $200.
But is this right to buy the stock indefinite or does it expire at some point?
Another major term of an option answers this question; the expiration date is the final date that the option can be exercised. For our option on $AAPL, the obligation might expire a day, a week, a month or even years from the date of purchase.
The final (and most important!) term of an option contract is the amount of money exchanged between the buyer and seller for their rights under the option contract. This is called the premium and it is the cost of the option contract that is listed on the exchange. The buyer pays the premium and the seller receives the premium.
We will delve much deeper into the specifics of options, but it’s important to know that an option gives you the right but not necessarily the obligation to buy or sell a specific financial instrument at a certain price on or before a certain date. It costs a certain price which is called a premium.