newbie question about options

[poker1O1]

I have a good understanding of the stock market with exception to options. i honestly dont know understand them at all. can someone please explain. ty.

[OrangeCat]

A good overview:
http://www.investopedia.com/university/options/

Options on futures:
http://www.orionfutures.com/opts.htm#terms

Options as used for employees:
http://money.howstuffworks.com/question436.htm

If you really want to get into it, here is an online tutorial:
http://www.cboe.com/LearnCenter/Tutorials.aspx#Basics

[cwsiggy]

McMillan's books are also good

[J_V]

People that start posts like this don't want links. They want someone to explain options to them in 1-2 minutes so that they can get their options knowledge on par with their acute understanding of stocks.

I'll help him out.


An option is the right but not the obligation to buy a stock at your excercise price. If that's not right, who cares.

[Recliner]

[ QUOTE ]
People that start posts like this don't want links. They want someone to explain options to them in 1-2 minutes so that they can get their options knowledge on par with their acute understanding of stocks.

I'll help him out.


An option is the right but not the obligation to buy a stock at your excercise price. If that's not right, who cares.

[/ QUOTE ]

That's only a call, what about a put option? Which is the right to sell a stock at the strike price. If you really don't care if anything you post is correct then why bother posting?

[Rotating Rabbit]

Yes, the holder of a put option has the right to sell at the exercise price K.

You can have 'american style' options which allow you to exercise at any time up to the expiry time, and 'european style' that allow you to exercise only AT the expiry time.

An american call is worth the same as a european call provided there are no dividends to be paid.

This is not the case for a put option for all interest rates >0.

[crazy canuck]

An american call is worth the same as a european call provided there are no dividends to be paid.


This is not true. In fact under the Black Scholes framework the price of an american option (call or put) can't even be expressed analytically, i.e. there is no formula for it.

[GeorgeF]

1) The only real use of options is when you have a large gain but you do not wish to trigger taxes by selling. You can insure your gains by purchasing options. If it were not for taxation, much fewer options would be sold as people would just sell their positions. All other options tranactions are gambling or by people that cannot sell for other reasons.

2) People that sell you the options are 'sharps' and they are not doing it because they want you to be rich.

3) Try your local business library (it's free). It might be worth your while to go to buy a finance 101 text, perhaps last years from ebay or what ever. Their may even be an online course worth the effort.

4) Stocks are actually options. They are an option on the value of a company exceeding it's liabilities (debts).

5) Just for fun you might take buy an option for a few hundred $ (cost to you of 1 option = 100 x listed price) on a 2007 option and watch what happens over the next few years.

6) Good luck you will need it.

[edtost]

[ QUOTE ]
The only real use of options is when you have a large gain but you do not wish to trigger taxes by selling.

[/ QUOTE ]

there are many reasons one would want to purchase various types of derivative securities.

in fact, this sentence was so dumb and displayed such a fundamental misunderstanding of derivitaves markets that i stoppped reading; i hope (for the sake of the forum) your post didnt get any worse.

[GrunchCan]

[ QUOTE ]
i hope (for the sake of the forum) your post didnt get any worse.

[/ QUOTE ]

It did.

[ QUOTE ]
4) Stocks are actually options. They are an option on the value of a company exceeding it's liabilities (debts).

[/ QUOTE ]

Wrong. In fact, this doesn't even make any sense.

There are 2 kinds of options: calls and puts. I’ll describe call options now, and puts in a moment.

When you buy a call option, you buy a contract that gives you the right to buy a specified stock at a specified price on or before a specified date. The stock is called the “underlying,” the prearranged price is called the “strike price,” and the specified date is the “expiration date.”

This contract is not free – it comes at a price that is at least loosely based on a “theoretical value” for that contract. For example, as I type this IBM stock is trading at $89.96 per share on the NYSE. IBM call contracts with a strike price of $80 (giving the contract owner the right to buy IBM stock at $80.00), and an expiration date in July are going for $12.30 per share on the CBOE. If you were to buy the contract and exercise at that same moment, you would end up owning 1 share of IBM stock but you would have paid a total of $92.30 for it ($80 for the strike price + $12.30 for the option itself).

That doesn’t mean options are bad – they have their place. In fact, there are lots of professional traders who do nothing but trade options.

There are also put options. They are the same as call options, with 1 difference. Instead of being a contract to buy stock at a specified price, put options are a contract to sell stock at a specified price. Everything else is the same.

You can either buy or sell options. If you sell an option, you don't have to own one first. You can just write up your own options contract and sell it in the marketplace. This is different than the stock market. In the stock market, there are X shares of ABC company that traders buy & sell amongst themselves. But in the options market, contracts come in to and go out of existance all the time.

Options aren’t for everyone, but it is absolutely incorrect to suggest that they have no place in a diversified investment portfolio. And it is wrong to imply that anyone trying to sell you an option is trying to rip you off. I haven’t given you enough information to be able to trade in options profitably – or even safely. Options could carry a great deal of risk. It would be a very bad idea for anyone reading this to execute options trades if the extent of your options knowledge is this post. You could lose your shirt. I'm serious - you could really get in to serious trouble if you don't know what you are doing. Much more trouble than just buying & selling stocks.