To the beginning investor, an option contract can be very confusing and difficult to understand. Investors who normally buy stocks online may be interested in expanding their trading opportunities. One such method is to define an options trading strategy that combines investing in stocks and using options to hedge against your positions. Another possibility is to use options to bring in some additional cash flow.
Options contracts are made up of three parts that are critical to each contract. Before you begin trading options, be sure to understand these terms -
- Strike Price - The strike price of the options contract refers to the price at which an option can be exercised. The strike price stays constant for the life of the option contract up through the expiration date. For call options, the strike price is the price where the underlying security can be purchased. Likewise, the strike price of a put option is the price that the underlying security can be sold.
- Symbol - The option contract symbol is unique to a particular contract and is similar to a stock symbol. The options symbol uses the following equation to derive it's symbol - Stock Symbol or Equivalent + Month + Strike Price. Certain codes and lettering are used to represent the month and strike prices.
- Expiration Date - The expiration date of an option contract is the date the contract will expire and the contract will become void. Expiration dates for all options occur on the third Friday of every month.
Understanding the basics of an options contract is the first step you can take to defining your options trading strategy.
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