Stock Options
April 29th 2006
|
 |
|
Business |
|
Exchange traded options have been considered risky investments that only
experienced traders would use, but they can be used by other investors
as well. They date back to 1973, and according to Barron’s magazine,
options are the number one investment that people want to know more
about.
Options may give investors increased cost efficiency, and may be less
risky than equities. They also have the potential to deliver a higher
percentage return, while giving the investor a number of strategic
alternatives.
An option is a contract that gives the buyer the right to buy or sell an
underlying asset at specific price on or before a certain date. There
is no obligation to do so of course, and like a stock or bond, an option
is considered a security. It is a binding contract with strict terms
and properties.
Options cost money, whether you actually follow through on the purchase
of the stock or not. According to Investopedia, options are called
derivatives, which means an option derives its value from something
else. If the specified time elapses after you buy the option, and you
do not follow through with the purchase, the option becomes useless.
There are two types of options: Call and Puts. A call gives the option
holder the right to buy an asset at a certain price within a specific
time period. A call is similar to having a long position on a stock. A
purchaser of a call hopes the stock increases in value.
A put gives the option holder the right to sell an asset at a certain
price within a specific time period. This is similar to having a short
position on a stock. Here the buyer of the option hopes the price of the
stock falls.
An option holder is the one that buys the option, while an option writer
is the person that sells the option. Typically buyers are said to have
long positions, and sellers are said to have short positions. The buyer
has no obligation to follow through on the sale or purchase, but they
are out the cost of the option either way.
The strike price is the underlying price a stock can be purchased or
sold for within a specified time. This is the price a stock price must
go above (for calls) or go below (for puts) before a position can be
exercised for a profit.
A listed option is one that is traded on a national options exchange,
like the Chicago Board Options Exchange (CBOE). A call option is “in
the money” if the share price is above the strike price. A put option
is “in the money” if its share price is below the strike price. Another
word for the amount an option is “in the money” is “intrinsic value”.
The total cost of the option is called the premium. The cost (or price)
is determined by factors including the stock price, strike price, time
remaining until expiration (time value) and volatility.
There are many
books on the subject. There are strategies for both the writer of an
option and the holder. Alan Simon’s Book, Stock Options for Dummies,
describes what to look for in your own company’s stock options.
Lawrence G. McMillan’s Book, Options as a Strategic Investment, goes
into detail for investors.
Dan Wilson
Best Syndication
Books on Investing
Keywords and misspelling: otpions investmint investing intesters
socks
Berkshire Hathaway hathway birkshire coke gillet gillette gilette Buffet
Bufett
|
