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Learn About Option Pricing

In this article I am going to discuss a technique that involves buying options. Options are traded like stocks. You can buy them from your brokerage account or exchange. Let me explain more.

1. First, a brief introduction. Options are the products of a stock contract (SE). The SE is the security that gives you the right to buy or sell a specific stock at a specific price on or before a specific date.

2. The price of the option can be up to 100% of the value of the underlying stock.

3. An option contract can be exercised on or before a specific date and time.

It is like a contract. The price is also known as the strike price. The expiration is usually later than the date of the option contract. If the strike price is $40, the expiration is on the second Friday of the expiration month. There are 5 expiration months in total.

Now you can see that an option is like a contract. As a buyer, you can buy the option contract directly from the option exchange or from your broker. You can buy the option contract for a specific premium or a market premium. There is no specific limit to the amount of option you can buy.

The price of an option is not the same as the stock price. But if you want to know how much can I make as a buyer of an option, just multiply the strike price by the premium (in the next section).

For the buyer, the biggest advantage is that the option contract becomes cheaper as time goes by. The amount you can make is basically the amount the stock price increases as the expiration date approaches. Here are some examples. You buy an option on Sep 15 for $50. When the expiration date approaches, the stock price increases to $55. Then as the expiration date approaches, the option contract increases by $5 per share (because the premium is $5 per share). The total amount you can make is $70.

Of course, the last example is only an example. If the stock price goes down, the amount you can make will only be $55, but that is the maximum amount you can potentially make. The amount you can lose will be $35 (the amount you paid to buy the contract).

Finally, keep in mind that options have high risks. Like all investments, they involve risk of loss.

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