An option is a contract between a buyer and a seller, based on an underlying security, usually a stock. Options trading is when the buyer pays the seller a fee, or premium, in exchange for certain rights to the stock option. In exchange for the premium, the seller assumes certain obligations.
Options trading occurs through stock exchanges, with prices quoted each day in the financial section of newspapers. Each options contract is for 100 shares of stock. So one contract quoted at $5 will cost you $500 (before commissions).
Calls give the holder or buyer the right to buy the underlying security at a specified strike price until the expiration date. Puts grant the holder or buyer the right to sell the underlying security at the strike price until the expiry date.
Each options trading contract has a limited life span, or time to expiry—usually less than nine months. The expiry date is the date on which the contract expires. The strike, or exercise price, is the price at which the rights granted to the buyer can be exercised.
In options trading, we think that you will eventually lose. That’s the key difference between most aggressive investing methods and stock option investing. If you want to invest aggressively, our best advice is to avoid options and buy stocks like those we recommend in our Stock Pickers Digest newsletter.
At TSI Network, we recommend using our three-part Successful Investor philosophy:
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