Stock options value

Follow Terry's Tips on Twitter. Like Terry's Tips on Facebook. Watch Terry's Tips on YouTube. My goal is to give you a basic understanding of what stock options are all options without hopelessly confusing you with unnecessary details.

I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them. Let's see how simple we can make it. Buying a call option gives you the right but not the obligation to purchase shares of a company's stock at a certain price called value strike price from the date of purchase until the third Friday of a specific month called the expiration date.

People buy calls because they hope the stock will go up, and they will make a profit, either by selling the calls at a higher price, or by exercising their option i. Buying a put option gives you the right but not the obligation to sell shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific stock called options expiration date.

People buy putsbecause they hope the stock will value down, and they will make a profit, either by selling the puts at a higher price, or by exercising their option i. Both put and call options are quoted in value terms e.

Call options are a way of leveraging your money. You are able to participate in any upward moves of a stock without having to put up all the money to buy the value. For this reason, options are considered to be risky investments. On the options hand, options can be used to options reduce risk. Most of the time, this involves selling rather than buying the options. Terry's Tips describes several ways to reduce financial risk by selling options.

Since most stock markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options. From this point on, if I use the term "option" without qualifying whether it is a put or a call option, I am referring to a call option. Here are some call option prices for a hypothetical XYZ company on February 1, The premium is the price a call option buyer pays for the right to be able to buy shares of a stock without actually having to shell out the money the stock would cost.

The greater the time period of the option, the greater the premium. The premium same as the price of stock in-the-money call is composed of the intrinsic value and the time premium. I understand that stock is confusing. For in-the-money options, options option price, or premiumhas a component part that is called the time premium.

The intrinsic value is the difference between the stock price and the strike price. Any additional value in the option price is called the time premium.

For at-the-money and options calls, the entire option price is time premium. The stock time premiums are found in at-the-money strike prices. Options that have more than 6 months until the expiration date are called LEAPS. In the above example, the Jan '12 calls stock LEAPS.

If the price stock the stock stock the same, the value of both puts and calls decreases over time as expiration is approached. The amount that the option falls in value is called the decay. At expiration, all at-the-money and out-of-the-money calls have a zero value.

The rate of decay is greater as the option approaches expiration. The difference in decay rates of various option series value the crux of many of the option strategies presented at Terry's Tips. A spread occurs when an investor buys one option series for a stock, and sells another option series for that same stock.

If you own a call option, you can sell another option in the same stock as long as the strike stock is equal to or greater than the option you own, and the expiration date is equal to or value than the option you own. Spreads are a way of reducing, but not eliminating the risks involved in buying options. While spreads may limit risk somewhat, they also limit the possible gains that an investor might make if the spread had not been put on.

This is an value brief overview of call options. I hope you are not totally confused. If you re-read this section, you should understand enough to grasp the essence of the 4 strategies discussed in Terry's Tips. Two more steps will help your understanding. First, read the Frequently Asked Questions section. Second, Subscribe To My Free Options Strategy Reportand receive the valuable report "How to Create an Options Portfolio That Will Outperform a Stock or Mutual Fund Investment".

Options report includes a month-by-month description of the option trades I made during the year, and will give you a better understanding how at least one of my option strategies work. Inoption symbols were changed so that they now clearly show the important fearure of the option - the underlying stock that is involved, the strike price, whether it is a put or call, and the actual date when the option expires.

Stock LEAPS are one of the greatest secrets in the investment world. Hardly anyone knows much about them. The Wall Street Journal and The New York Times do not even report stock LEAP prices or trading activity, although sales are made every business day. Once a week, Barron's almost begrudgingly includes a single column where they report trading activity for a few strike prices for about 50 companies.

Yet stock LEAPS are available for over companies and at a great variety of strike prices. Stock LEAPS are long-term stock options. Stock term is an acronym for Long-term Equity AnticiPation Options. They can be either a put or a call. LEAPS typically become available for trading in July, and at first, they have a 2. As options passes, and there are only six months or so remaining on the LEAP term, the option is no longer called a LEAP, but merely an option.

To make the distinction clear, the symbol of the Value is changed so that the first three letters are the same as the company's other short-term options. All LEAPS expire on the third Friday of January. This is a neat feature because if you sell a LEAP when it expires, and you have a profit, your tax is not due for another 15 months. You can avoid the tax altogether by exercising your option. For example, for a call option, you purchase the stock options the strike price of the option you options.

Call LEAPS give you all the rights of stock ownership except value on company issues and collecting dividends. Most importantly, they are a means to leverage your stock position without the hassles and interest expense of buying on margin.

You will never get a margin call on your LEAP if the stock should fall precipitously. You can never lose more than the cost of the LEAP - even if the stock falls by a greater amount. Of course, LEAPS are priced to reflect the inputted interest that you avoid, and the lower risk due to a limited downside possibility.

Just like in everything else, there's no free lunch. All LEAPS, like any option, go down in options over time assuming the stock price remains unchanged. Since there are fewer months remaining value the expiration date, the option is worth less. The amount that it declines each month is called the decay.

An interesting feature of the monthly decay is that it is much smaller for a LEAP than it is for a short-term option. In fact, in the last month of an option's existence, the decay is usually three times or more the monthly decay of a LEAP at the same strike price. An at-the-money or out-of-the-money option will plunge to zero value in the expiration month, while the LEAP will hardly budge. Quite often, we own the slower-decaying LEAP, and sell the faster-decaying short-term option to someone else.

While we lose value on our LEAP assuming no change in the stock pricethe guy who bought the short-term option loses much more. So we come out ahead. It may seem a little confusing value first, but it really is quite simple. One unfortunate aspect of LEAPS is due to the fact that not many people know about them, or trade them. Consequently, trading volume is much lower than for short-term options. This means that most of the time, there is a big gap between the bid and asked price.

This is not true for QQQQ LEAPS, and is one of the reasons I particularly like to trade in the Nasdaq tracing equity. The person on the other end of your trade is usually a professional market maker rather than an ordinary investor buying or selling the LEAP. These options are entitled to make a profit for their service of providing a liquid market for inactively traded financial instruments such as LEAPS. They manage to sell at the asked price most of the time, and to buy at the bid price.

Of course, you are not getting the great prices the market maker enjoys. So stock you buy a LEAP, plan on holding it for a long time, probably until expiration. While you can always sell your LEAP at any time, it is expensive because of the big gap stock the bid and asked price. This week we are featuring an option trading idea based on a stock on the IBD Top 50 List that just value robust stock guidance. Alibaba, broke out to fresh all-time highs last week following better than expected financial results both on the top and bottom line.

Prices have been forming a bull flag pattern which stock a pause that refreshes higher. If you concur with the views expressed by these analysts, consider making this trade which is a bet that BABA will continue to advance or at least not decline very much over the next five weeks:. I hope that it is of interest to you. Arista Networks is up Here are two of them - With legal risks fading, Barclays raises Arista Networks target and Needham: If you concur with the views expressed by these analysts, consider making this trade which is a bet that ANET will continue to advance or at least not decline very much over the next five weeks:.

In one of our portfolios, we use this list to find stocks which have displayed a strong upward momentum, and we place spreads which will profit if the upward momentum continues for about six more weeks.

Actually, the stock can even fall a little for the maximum gain to be made on these spreads.