Here are some things to understand about when persuing your options trading education.
Options are traded on regulated markets and each option is created and traded on the premise of the underlying stock. There are thousands of stocks that that allow for trading options, so you won’t be short of variety, but in comparison to the stock market, there can be liquidity challenges - something that will come up later in your options trading education.
Options are based on a predetermined time frame with an expiration date. That’s why an exchange traded options will have a particular month affixed to it’s trading symbol. Learning these symbols are not necessary for options trading education, however, when investing in a particular option with an outcome in mind (stock moving higher or lower perhaps), it must make that move before expiration. Otherwise your option will likely expire worthless.
Options Trading Education: Understanding the Strike Price.
The strike price of an option covers a range of movement based on the trading interest in the options market. For example if a stock is trading at $100, strike prices could range from $25 to $225. That means you could use those strike prices as markers of your predictions as to where the stock will be, by the time your option expires.
The premium of an option is what an option buyer will pay to the option seller for the right to do something – essentially sell it at a later date, but before the option expires. The buyer can make money if he guesses right and the seller can make money if the option expires worthless, thus he has “earned” the premium.
The bid and ask prices of a market are currently the highest bids to buy, and the lowest offers to sell an option. These are usually divided by 1/4 dollars and all trading must take place on or between the bid and offer. There is normally a market maker assigned to each option that allows for, and helps liquidity in the market place. Again, this is great news for smaller traders as you will always be able to get your order filled quickly. If this is difficult to understand, then read this article about options trading for dummies.
One option normally represents 100 shares of the underlying stock. This is because 100 shares is considered what is called a “board lot”, which is the minimum trading size for competitive price participation in the market. If you own one call option you bought for $3, you would actually be investing $300 (plus commissions) for the option. This is something you will absolutely need to understand from your options trading education because it goes directly to your ROI.