Saturday, September 20, 2008
Stock Options
| Companies are increasingly offering employees stock options as a partial substitute for payroll in an attempt to build morale and company pride. Due to this trend, there are many people who have a substantial monetary interest in understanding them. There are two types of stock options: call and put. A call is the right to buy a specified number of shares at a given price before a specific date. A put is the right to sell a specific number of shares at a given price before a specific date. An important difference between futures (not discussed here) and options is that options are a right and not an obligation to buy the shares. The price at which the option may be bought or sold is called the exercise or striking price. Options do expire at a time called the expiration price. An option is known as "in the money" has an exercise price below the current stock price if it is a call option, or above the current price if it is a put option. Expiration months are set at intervals of three months for the cycles. An option expires at 11:59 P.M. Eastern Standard time on the Saturday immediately following the third Friday of the expiration month. The exercise price is set at intervals of five dollars for stocks under $50, ten for stocks $50 to $200, and twenty dollar intervals for stocks trading over $200 per share. Initial exercise prices are set above and below the stock price at the time the option is opened. For example, if a stock is trading for 48 3/8 per share, the exercise prices would be set at 30 and 40 (for puts and calls). If the stock is very close to the normal initial exercise price (e.g. 40 1/8), the option is set at the standard price as well as above and below the standard price. There are several things you must realize before trading options. (1) Options do not exist on every single stock--in fact, only a small percentage of stocks have options that trade on them. (2) When you want to trade an option, look in the financial newspapers to see what stocks have options trading on them, and look to see what months and strike prices are available. (3) Each option contract covers 100 shares. When the newspapers show that an option is prices at 1 and 1/2, that means that those contracts are $150 each. In summation: If you think a stock is going to go up, there are essentially three ways to make money. You can buy the stock, buy a call, or write a put. If you think a stock is going to go down, there are also three ways to make money--you can do the opposite of what you do if you think the stock is going up. You can short the stock, write a call, or buy a put. Options can be very risky, but as always, very profitable if you know what you are doing! |
posted by hearthy at 7:58 PM
