1. Options give the best to the individual to purchase or sell the underlying asset or instrument.
2. You are not obliged to buy or sell the underlying asset, you only have the best, if you buy options. Meaning, you can choose to purchase the options, sell the options or do nothing and let it expire, depending on what is most good for your place.
3. Possibilities are either call or put. Call options give the power to the buyer to buy the options. Put options give the buyer the right to sell the options.
4. Options are offered per share, but are sold in 100 share lots. Meaning, when the buyer purchases 1 choice, he or she is buying 100 shares.
5. The investor only has to pay the choice premium and maybe not the quantity of stocks like in case you are getting per stock. For example, if the option premium of the $50 stock is $3, the total amount of the agreement is $300 per option. So when the investor is buying 3 options at $3 per option, since she or he is buying in 100 discuss lots, the total payment would be $900 (3 options x 100 shares per option x $3 option premium).
6. Buying shares is different. You have to pay for per share. As an example, the stock price of Company A is $80. If you want to buy 100 shares, you would need to pay $8,000. While with options, if you wish to spend on 100 shares, you only have to access a contract whereby you would get one option at a certain option premium.
7. If you wish to choose the stock in the end of the contract, that will be the only time where you will pay the total amount of money that’s equivalent to how many option contracts, increased by contract multiplier. Reference no 6 for instance.
8. If the consumer exercises his rights to get the option (call), the vendor (or the author) is obliged to provide the underlying asset.
9. If the buyer exercises his rights to offer the solution (put), the seller is obliged to buy the underlying asset.
10. If the customer wants to exercise his rights to either buy or sell the underlying asset, the vendor should either sell it or buy it at the strike price, regardless of its current price.
1-1. Just in case the buyer of the option decides to do nothing at the end-of the contract for whatever reason, the owner keeps the option premium as income.
1-2. In computing your profit, you have to take into account 2 things: the option premium and the strike price. The strike price is $50 and If the option premium is $2, your break-even point is at $52. Therefore in order for you to make a profit, the investment has to be over $52. When the stock drops below $52, say $49, and there’s no time left, you don’t lose $3 per stock. What you’ll lose, however, is the choice premium you’ve taken care of the contract.
Note: The numbers were only selected of the air to demonstrate how choices trading work. In real-world, numbers vary widely so you need to vigilantly study each of them.
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