Options

An option is a contract that gives the investor the right to buy or sell at a specific price before an expiration date.

Options trading offers many advantages. Trading options requires you to commit less to an investment than a stock. There are a number of strategic alternatives and have the potential to deliver high returns. It is important to remember that there are risks when investing in the stock market.

If you buy a call, you hold the right to purchase a certain security at the strike price, on or before the expiration date. If you write a call, you face an obligation to sell a certain security at the strike price, on or before the expiration date, if the call is exercised. If you buy a put, you hold the right to sell a certain number of shares at the strike price, on or before the expiration date. If you write a put, you face an obligation to buy a certain number of shares at the strike price, on or before the expiration date, if the put is exercised.

For the majority of brokerages, the minimum deposit can be less than $1,000 but some can require as much as $10,000. Your minimum is based on how much the broker allows.

Knowledge is key. For some, it will be better to start trading stocks and gain an in-depth knowledge before stepping into the world of options. For others, there are option strategies that can be a steady introduction into trading options, like a long call and a covered call.

Day trading refers to establishing and liquidating the same position or positions within one day’s trading, thus ending the day with no open position in the market. The primary goal is to earn a small profit on each trade and compound the gains over time. Volatility and intense focus are vital to day trading. Typically, day trading isn’t intended for casual investors.

Pricing models are mathematical models used to price options for factors including current price, strike price, volatility, interest rate, and expiration date. A couple of common pricing models are binomial option pricing, Black-Scholes, and Monte Carlo simulation.

Time decay is the decline in value of your option as the expiration date approaches. Intrinsic value is the value of an option if you exercised it at a given moment. Out-of-the-money and at-the-money options have no intrinsic value. For in-the-money options, the intrinsic value is the difference between the strike price and the underlying stock price.

A credit spread option is a contract that includes the purchase of one option and the sale of a second similar option with a different strike price. Essentially, an investor would be exchanging two options of the same class and expiration, transferring credit risk from one party to another.

A stop-limit order combines the features of a stop with those of a limit order and is used to mitigate risk. It enables a trader to have precise control over when an order should be filled, but it’s not guaranteed.

No, you can trade an option before expiration.

Rolling options is extending your options strategy by closing an existing position and opening a new one on the same underlying instrument with a different expiration or strike price.

Long-term equity anticipation securities (LEAPS) are publicly traded option contracts with expiration dates longer than a year from issue. The expiration dates are typically up to three years.