 |
Online Trading Singapore |
Singapore forex trading, stock trading strategies online |
Today's Quote
You have to be smart. The easy days are over.
~Robert Kiyosaki
Option Trading - Table of Contents
Option Trading: Option Basics
Option Trading: Buying and Selling Option
Option Trading: FAQ
Option Trading: Glossary
Option Basics
What is Option?
What are the features of Option?
What are the Options Terms?
What are Call and Put?
What are the factors affecting the Premium?
What is Option?
There is only two kinds of options: Call Options and Put Options.
An Option is a contract between two parties giving the holder(buyer) the right, but not the obligation, to buy or sell an underlying asset (a stock or index) shares at a specific price on or before a expiry date. ( a contract is 100 shares of the particular underlying asset ).
To acquire this right the taker pays a premium to the writer (seller) of the contract.
What are the features of Option?
Contract Size - an option contract size is standardised at 100 underlying shares.
The Strike (or Exercise) Price - the price at which the underlying security can be bought or sold.
Expiration day - The Expiration Date is the last day of trading after which the option is no longer valid and ceases to exist. The expiration date for all listed stock options in the U.S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday).
Premium - the price of the option. It is the price you pay to purchase the option.
example:
The option premium of a "MAY 27.5 CALL" of ABC Company is $0.50
MAY - Expiration Date (option will expired in May)
27.5 - Strike Price / Excerise Price
CALL - A Call Option
PREMIUM - Cost of the option. (Paid to Seller)
What are the Options Terms?
In-the-money(ITM), at-the-money(ATM) and out-of-the-money (OTM)
A call option is in-the-money when the underlying price is higher than the option’s exercise price, and is out-of-the-money when the underlying price is lower than the option’s exercise price. A put option is in-the-money when the underlying price is lower than the option’s exercise price, and is out-of-the-money when the underlying price is higher than the option’s exercise price. An option is at-the-money when the underlying price is equal to the option’s exercise price. In practice the option with the exercise price nearest to the prevailing underlying price is called the at-the-money option.
Volatility
The volatility of an option is a measure of the spread of the price movements of the underlying instrument. The more volatile the underlying instrument, the greater the time value of the option will be. This will mean greater uncertainty for the option seller who, will charge a high premium to compensate. Option prices increase as volatility rises and decrease as volatility falls.
What is Call and PUT Option?
Call Option
A call option gives the buyer the right, but not the obligation, to buy the underlying security at a specific price for a specified time. The seller of a call option has the obligation to sell the underlying security should the buyer exercise his option to buy.
Put Option
A put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell.