Introduction to Options

Options - Brief Introduction

There are two basic types of options: call options and put options. A call option gives the holder the right to purchase the underlying asset at the specified strike price on or before the option's expiration date. A put option gives the holder the right to sell the underlying asset at the specified strike price before the option's expiration date. For example, an August call option for Google stock with a strike price of $300 would give the owner of the option the right to buy Google stock for $300 anytime on or before August. Of course, the owner of the option would only want to excercise the option if Google stock is above $300. On the other hand, if it were a put option, then the owner of it would only want to excercise his right to sell the option if the stock were below $300. An option is "in the money" if it could be used for a profit and "out of the money" if excercising it would return no profit. Options must be bought for an amount called the premium, which goes to the seller of the option.

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