Basics of Options

When investing in options, you should be familiar with the related terminology and requirements of these investments. Having a good understanding of options basics will help you to navigate this profitable investment territory.
Options are contracts that allow you to either buy or sell an underlying financial product. Equity options can include products such as stocks, exchange traded securities, and other similar financial vehicles.
There are two types of equity options. These are known as puts and calls. You can buy or sell both puts and calls. If you purchase an option, the purchase price is known as the premium. And, if you sell an option, you will receive a premium.
The two parts of the option’s premium are the intrinsic value and the time value. If your option is in-the-money, then it is considered to have intrinsic value. The difference between the intrinsic value and the amount of the premium is known as the time value.
If you buy a call, it gives you the right to purchase the underlying financial interest at a specific stated strike price either on or before the options expiration date. If you buy a put, this means that you have the right to sell the underlying financial interest on or prior to the expiration date.
Conversely, you can also sell, or “write,” both calls and puts. When you sell a call, you will be obligated to sell the underlying financial instrument at a specified strike price – if you are assigned to do so. And, if you sell a put, you will be obligated to purchase the underlying financial instrument – again, if you are assigned to do so.
There are a number of factors that can affect the price of an option. These include both supply and demand in the market where the particular option is being traded. This is somewhat similar to how individual stocks are priced. The overall investment market and the economy can also affect the price of an option as well as its underlying financial instrument.
A good understanding of options basics is important prior to investing in these types of investments. This way, you can be sure you know the correct way to proceed.