Options Basics: Understanding the terminology
Today's Financial News - Posted November 20, 2009
Karim Rahemtulla, options guru at Investment U, explains the basics of In, At, and Out-of-the-Money plays.
Karim Rahemtulla (Investment U):
To put it bluntly, some people are just downright afraid of the options market.
It’s too bad. Most believe the popular misconceptions and myths about options – among them, that they’re too complex, too confusing and too risky – or are just reluctant to the leave the relative comfort zone of stock investing.
It’s also a mistake. Many investors are missing out on some huge gains when all it really takes is a better understanding about the options landscape.
And that’s what I’m here for. Because while options terminology is different, it’s not really that complicated. So let’s run down a few of the basics…
Options Terminology 101
When it comes to option trading, you’ll find that there are two basic varieties – calls and puts.
- Calls: A call option is the right, but not the obligation, to buy a stock at a certain price. This is called the strike price. It’s the right, but not the obligation, because you’re only on the hook for the amount of money that you paid for the option. So right off the bat, you know you can never lose more than what you paid. The extra bonus is that the upside is unlimited. If you want to bet on a higher share price, you buy a call option.
- Puts: A put option works in the opposite way to a call. It’s the right, but not the obligation, to sell a stock at a certain price. So if you’re betting that IBM (NYSE: IBM) will decline, you’d buy a put option. And again, the strike price that you choose is the level at which you have the right to sell IBM. However, you’re not obligated to do so.
Now let’s break it down a bit more by detailing the kind of options that you can buy and sell…
Click here to read the rest of Mr. Rahemtulla’s article on Investment U.
Next Article: Why biotechs like CombinatoRx (CRXX) make the best penny share speculations
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