1)       Call options give buyers the:

Long options always give the buyer some type of right. You will never incur an obligation by purchasing an option. Call options give buyers the right, not the obligation, to buy stock. If you buy a call, you can purchase 100 shares of the underlying stock at any time for the strike price.

 

Put buyers have the right, not the obligation, to sell stock. The put owner can sell 100 shares of stock and receive the strike price at any time through expiration.

 

ellers receive a premium for accepting an obligation. The seller of a call has the potential obligation to sell shares of stock for the strOption sike price while the put seller has the potential obligation to buy shares of stock for the strike price.

 

When options are first issued, they generally control 100 shares of stock.

 

The price at which you are contracting to trade shares of stock is the exercise price. It is also called the strike price because that’s where the deal was “struck.”

 

For call options, the intrinsic value is found by taking the stock price minus the strike price, assuming it is a positive amount. For put options, we take the strike price minus the stock price, assuming it is positive. With the stock at $55, a $50 call has $55 - $50 = $5 of intrinsic value. A $60 call has no intrinsic value since $55 - $60 = negative $5. Likewise, a $50 put has no intrinsic value since $50 - $55 = negative $5. The intrinsic value represents the amount of “immediate benefit” to the owner. If the stock is $55, the $50 call owner is better off by $5 since he can pay $50 for the stock rather than $55. The $60 put holder can sell his stock for $5 more than the current market price of $55 so he is better off by $5 as well. Whenever you are trying to figure out the intrinsic value, think if there is an immediate benefit in owning that option. If there is, it has intrinsic value. The intrinsic value is also the amount that the option is in-the-money.

 

                Each contract controls 100 shares of stock and you have the right to buy it for $40 per share. Therefore, it will cost 100 shares * $40 per share = $4,000 to exercise the call. In return, you will receive 100 shares of ABC.

 

If you are long options, whether calls or puts, you have rights. This means you are not required to ever buy or sell stock. You can buy or sell stock if you choose. It is your option to do so.

 

Long positions have the rights. It is the long position that decides whether or not to exercise. If the long position exercises then the short position must oblige. The short position has the obligation.

 

There is an immediate advantage in owning this call since it gives the buyer the right to pay $70 for a stock that is trading for $74. Specifically, there is a $4 advantage so that is the intrinsic value. The remaining 50 cents of value is due to time.

 

There is no immediate benefit in holding this call since it gives the buyer the right to pay $110 for a stock that is currently trading for $107. Therefore, there is no intrinsic value to this option. However, this does not mean the option has no value. Because time remains on the option, the stock does have a chance of rising above $110. All of this option’s value is due to the fact that time remains on the option.

 

The bid represents the highest price that someone is willing to pay. In other words, it represents the highest bidder. The asking price represents the lowest price at which someone will sell. Because someone is willing to pay $3, this means we can sell to that person if we wish to sell this option. Likewise, because someone is willing to sell for $3.20, we can buy the option for this price.

 

 

Put options give the holder the right to sell stock. Because this put allows the holder to sell for $30 when the stock is trading for $29, there is a $1 immediate benefit in holding this put. Therefore, this put is $1 in-the-money.

 

This call has $2 intrinsic value and $1 time value. If the stock is $47 at expiration, this option will be worth the $2 intrinsic value so the most you could lose is the $1 time value. Remember, the key to this question is that the stock remains at $47 at expiration. It is true that the most you could ever lose on this (or any) option is the amount paid, or $3 in this example. But the question is assuming the stock remains at $47. The only way you could lose more than the $1 time value is if the stock’s price falls below $47.

 

You are free to exercise an equity option at any time and the OCC guarantees the performance so there’s no need to find a buyer or seller. The only thing you must do is submit exercise instructions to your broker which is done with a simple phone call.

 

The OCC acts as a middleman to every transaction. If you buy an option, you are really buying it from the OCC. If you sell an option, you are selling it to the OCC.

 

Options trade in units called “contracts” because that’s what they are – contracts between two people to buy and sell shares of stock. Stock trades in “shares” while options trade in “contracts.”

 

The last trading day is the third Friday of the expiration month. Technically, options expire on Saturday following the third Friday but the last “trading” day is the third Friday.

 

A wasting asset is one whose price declines with the passage of time. Some options decline very little while others decline much more and much faster. Regardless, all options are classified as a wasting asset.

 

All equity options are American style, which means you can exercise them at any time prior to expiration. Bermudan and Asian options are actually styles too but they fall under the category of exotic options.

 

Put sellers have the potential obligations to buy stock. They must buy the stock only if the long put holder decides to exercise.

 

                Call sellers have to sell stock only if the long call holder exercises.

 

Option sellers always keep the premium regardless of what happens. That is their fee for accepting some type of obligation (risk).

 

You can always get out of an option contract by entering a reversing trade of the same month and strike. If you originally purchased an ABC $50 call you would enter a reversing trade by selling an ABC $50 call.

 

 

 

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