In the bluntest terms, option contracts are limited term up (calls) or down (puts) bets that are 100:1 (for stocks) leveraged that traders and speculators can buy and sell.
Each contract is worth 100 shares of that particular stock, with the option to buy or sell the stock at the strike price. The strike price is the over/under price that determines whether or not the option contract will have value by its expiration date: usually, the third Friday in a designated month.
Example:
Facebook (NASDAQ: FB) is trading at 150 In October. If one thinks FB will reach 160 by mid January, she could buy 100 shares of FB at a cost of $15,000. That might be a bit out of budget for some investors to allocate for a single stock, and a 10-point gain would yield a profit of $1,000 before commissions, or 6%. On the other hand, a single call option contract of FB January 150 might be at 5, or cost $500. If FB did indeed go to 160 before or by mid-January, the call option would be "in-the-money," i.e. over the strike price of 150 for 10. As long as the contract was either sold (realizing a 100% profit before fees) or exercised (purchasing the stock for 150 when the current price is now 160, thereby locking in the profit).
On the plus side, option contracts are very leveraged, but the cash outlay is small enough to manage for a singular speculation without risking a significant part of a portfolio budget, and can multiply one's profit if a number of contracts are obtained and the bet is correct. On the negative side, the risk is high, since the premium value erodes with each calendar day. Stagnancy or a trend against your bet's direction can result, and often does, in loss of the entire trade amount, if not carefully monitored.
Option contracts are considered derivatives, and are also the mechanical basis for all other kinds of derivatives trading, most notably in futures. The futures market includes options, indexes, interest rate securities swaps, commodities, foreign exchange, warrants, and even more obscure markets, such as carbon credits, tax credits related to film and TV production, and others.
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Finance: What is Intrinsic Value (of An ...6 Views
Finance allah shmoop what is the intrinsic value of an
option All right this is brandi She owns a twelve
dollars strike price call option toe buy a share of
my fifteen minutes are up dot com a retirement home
chain for reality tv stars who recently gained self awareness
Well the stock is trading for fifteen bucks a share
of this moment Her strike price is twelve so the
intrinsic value of that option is fifteen minutes twelve or
three bucks that is it is three dollars in the
money and if brandy converted it into a share this
moment and then immediately sold the stock for fifteen dollars
in cash well she'd make three bucks But there's a
catch per call option doesn't expire for five weeks so
that three dollars in the money is actually worth more
than three dollars because she has data or time yet
to exercise and convert or just sell the option itself
So it's worth mohr because well a stock might go
up from fifteen dollars in overtime Stocks go up so
in the next five weeks well couldn't go up a
dime twenty cents twenty five cents and make that three
Dollars worth three ten three twenty three Twenty five Sure
sure it could happen So yeah that's The difference between
actual value and intrinsic value You get seita kickers in
there making the option's worth more than just converting them
into stock and selling them right there And yeah it
looks like our one and a half minutes are up
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