Two kinds of Options are Calls and Puts
A call option gives the buyer the right but not the obligation
to buy a specific security at a specific price by a specific
date. Its a way of locking in the purchase price of the stock
for a period of time.
A put option gives the buyer the right but not the obligation to
sell a specific security at a specific price by a specific date.
Its a way of locking in the sales price of a stock for a
period of time.
The specific date is known as the contracts expiration date. On
or prior to the expiration date the holder of the option
contract has the right to exercise the option.
The term exercise means the process by which the buyer of an
option converts the option into a long stock position in the
case of a call or a short stock position in the case of a put.
The term assign or assignment means the process by which the
seller of an option is notified of the buyers intention to
exercise.
Buyers of options exercise. Sellers of options are assigned.
The strike price or exercise price is defined as the price at
which the holder has the right to buy (for a call) or sell (for
a put), the underlying security. Strike prices are quoted in
dollars, i.e. May 50 calls means May $50.00 strike calls.
There are several other important terms in an option contract:
A long position is defined as any position which will
theoretically increase in value should the price of the
underlying security increase. Vice versa, the position will
theoretically decrease in value should the underlying security
decrease.
The buying of stock, the buying of a call, or the sale of a put
all constitute a long position.
A short position is defined as any position which will
theoretically increase in value should the price of the
underlying security decrease. Vice versa, the position will
theoretically decrease in value should the underlying security
increase.
The selling of stock, the selling of a call, or the buying of a
put all constitute short positions.
The option class identifies the specific underlying security
the option is written on. The option series describes the
expiration month and strike price. As an example, lets use the
Microsoft (MSFT) May 65 calls.
MSFT is the option class. May 65 call is the option series. May
is the expiration month and 65 is the strike price.
Lets try one more. How about the Home Depot January 35 puts?
Home Depot (HD) is the option class. January is the expiration
month and 35 the strike price.
All stocks and options are identified by symbol. We have
discussed how the stock itself has a symbol (stock symbol HD =
Home Depot, while MSFT = Microsoft.)
Options have symbols too. These symbols are standardized for all
exchange traded (listed) options. A different letter identifies
each specific months call or put. The chart below shows which
letters coincide with which months calls and which months
puts.
Month Calls Puts
January A M
Febraury B N
March C O
April D P
May E Q
June F R
July G S
August H T
September I U
October J V
November K W
December L X
Following the month symbol is the strike price symbol. A letter
represents each different strike price. These strike prices are
also standardized for all listed options, as follows:
A = 5 H = 40 O = 75 V = 12.5
B = 10 I = 45 P = 80 W = 17.5
C = 15 J = 50 Q = 85 X = 22.5
D = 20 K = 55 R = 90 Y = Not Assigned
E = 25 L = 60 S = 95 Z = Not Assigned
F = 30 M = 65 T = 100
G = 35 N = 70 U = 7.5
For example, lets look at this symbol HD GF:
HD is the stock symbol that represents Home Depot
G signifies the month and type which is July calls
F indicates strike price that is 30
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