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What are Options?
First let’s discuss what Options are.
Options are securities that give the owner the right to buy a stock at a
specific price up until a specific day.
Options are traded just like stocks. You can buy them for most stocks
that are traded.
Option trading allows the investor to leverage their capital. For
example, instead of actually purchasing 1000 shares of a $100 stock, you
might be able to buy an option that allows you to buy that same stock
for $105 the next few months at maybe only $1 per contract. 1 Option
contract entitles the the holder of the option to buy 100 shares of the
stock. Therefore, in order to purchase 1000 shares of a given
stock, you would need to purchase 10 options. In this example,
instead of investing $100,000 to purchase the stock directly, you would
only have to spend $1,000 to purchase 10 options (10 options x $1 per
option x 100 shares per option = $1000).
If the stock goes up in that timeframe, you would make
approximately $1,000 for each $1 point move above $105. Conversely,
if the stock never gets to the $105 per share or goes down below
$100, you can loose some or all of the $1,000 you paid for the
options, since they would expire worthless.
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