Stock Option Basics
Stock Option Basics is essentially a contract between a buyer and a seller. An option will usually be connected to something like an exchange index, a listed stock, futures, real estate, and more. Stock options are the options you have in accordance with owning stock. There are two primary types of a stock option; American and European. American options are the most common. These stock options offer a contract which can be exercised from the duration of the date of purchase and the expiration date. A European stock option is a contract that is only allowed to be exercised on the expiration date. All stock options are designated by the name of the stock, the striking price, expiration date, and the premium amount paid for the option including the broker’s commission. A stock option can be a call or a put. If you own a call option you have the right but you are in no way obligated to purchase the stock at the strike price up until the date of the expiration. The option will be worthless once it reaches the expiration date. Many people sell options without even owning them. This method is referred to writing options. If you have written a call, you will be required to sell shares at the strike price prior to the date of expiration if you "get called". A stock option is written on a block of what could be 100s of shares. If you buy a contract or a stock option you are agreeing to buy that number of shares at a price per share. You will pay the price per share and the commission to make the purchase. If you wish to sell the option you will let your broker know and they will sell the stock and charge another commission. A stock option is most commonly used in the United States. This is the purchasing of large numbers of shares through a contractual obligation. There are expiration dates attached to options and you must exercise your rights prior to the option expiring.
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