Stock Options

Basic Principles of Stock Options

Understanding Stock & Option Terms

* Margin an account – borrow money to buy stock

* Long stock position – actually own the stock.

* Short stock – borrow stock which will be repaid with stock (hopefully cheaper)

* Short option – write (sell) the option

* Long option – buy the option

Options Clearing Corporation

* Positioned between buyer and seller.

* All trades are to or from OCC.

* Regulates trading activity of the various options exchanges.

* Sets minimum capital requirements.

* Provides for efficient transfer of funds among members as gains and losses occur.

Call Options

* Owner of the call option has the right to buy specific stock at a specified price within a specific time period.

* Price paid for an option is called a “premium”. This is paid to the option writer.

* The option writer (the seller of the option) must provide the stock if the option is exercised.

Put Options

* The owner of a put option has the right to sell specific stock at a specified price during a specific time period.

* Put option is purchased from a put writer.

* The put writer receives a “premium” for selling the put.

* The put writer must buy the put owner’s stock at a specified price if the option is exercised.

How Options Work

Current Position | Stock Goes to $0 | Stock Goes to $30 | Stock goes to $60 | Stock Goes to $90 |

Long 40Call @$5 | Call unexercised. Paid $5 for call | Call unexercised. Paid $5 for call | 60-40=+$20Pd $5 for call | 90-40=+$50

Paid $5 for call |

Short 40Call @ $5 | Call unexercised. Receive $5 for call | Call unexercised. Receive $5 for call | $40-60 = -$20 Rec. $5 for call | $40-90 = -$50Rec. $5 for call |

Long 40Put @ $5 | $40-0=+$40Pd $5 for put | $40-30=+10Pd $5 for put | Put unexercisedPd $5 for put | Put unexercisedPd $5 for put |

Short 40Put @ $5 | $0-40= -$40 Rec $5 for put | $30-40= -$10Rec $5 for put | Put unexercisedRec $5...