Option Basics

This chapter discusses the basics of options. A call option is a contract giving the owner of the option the right to purchase a fixed quantity of stock within a particular period of time and at the strike price. A put option gives its owner the right to sell a fixed quantity of stock within a particular period of time and at a specified price. Having long an option, one always have the right to exercise that option and either buy or sell the underlying stock, but it is entirely on choice. Having short options, one is obligated to buy or sell the underlying stock if the option is exercised without any choice. If the strike price is close to the current stock price, the option is referred as at-the-money. When the option has a net positive value if exercised, the option is said to be in-the-money. Call options with strike prices above the current stock price are out-of-the-money.