What is Options??? A lot of people keep asking what options is actually, let me give you brief explanation of options.
Options is a right to exercise an underlying at a certain price at a certain time. Then, one question arise again, what is exercise actually? Exercise means to buy or sell or in short we can say that it is the action we favor to do with the underlying. Underlying itself is the stuff that we want to exercise, can be forex, stocks, futures, indexes, etc. So, if a Stock Options is bought, then it means we have a right to buy or sell a certain stock at a certain strike price at the date we favor.
There are two types of options which I know based on the right:
1. Call Options
Call Options is a right to buy a certain underlying at a certain strike price at a certain price. For Example, Microsoft (MSFT) is now at $25, and it is expected to go up, then we buy call options in order to have the options increase in value. If we buy MSFT Dec10 25 Call, then when the options expired at Dec10 and if MSFT is closing at $27, it means that our options is now having a value of $2. Why? Because we bought the MSFT with a strike price of 25 (the Bold underlined blue color 25), which means we have a right to buy MSFT at $25 and sell it directly at the current trading price. So, we read the transaction as Buy To Open MSFT Dec10 at strike price $25 Call Options, which means we can buy MSFT at $25 from the date we buy up to the expiration.
2. Put Options
In the other hand, we have a Put Options which is a right to sell a certain underlying at a certain strike price at a certain price. Example, Microsoft (MSFT) is now at $25, and it is expected to go down, then we buy put options in order to have the options increase in value. If we buy MSFT Dec10 25 Put, then when the options expired at Dec10 and if MSFT is closing at $21, it means that our options is now having a value of $4. Why? Because we bought the MSFT with a strike price of 25 (the Bold underlined blue color 25), which means we have a right to sell MSFT at $25 and sell it directly at the current trading price. So, we read the transaction as Buy To Open MSFT Dec10 at strike price $25 Put Options, which means we can sell (short) MSFT at $25 from the date we buy up to the expiration date.
In options, we have two types of value which are the Extrinsic Value & Intrinsic Value. Extrinsic Value is the premium of the options, which slope is negative, which means the value will decrease as the time goes by, in short we can say that the value will be 0 (nil) at the expiration date. In the other hand, the intrinsic value is the value that will increase or decrease based on the underlying price, as what I said at the example above on Call & Put Options. So, in options trading, never bet on the extrinsic value increment, which will never happen, just hope that the underlying will go as what you wish in the position.
Well, in options we know that there are a lot of analysis, one of them is the Black Scholes Model, also known as the Greek. He invented this analysis and give four symbols Delta, Gamma, Vega, Theta. We'll discuss about them next week.
Happy Weekend^^
Happy Investing^^
Disclaimer ON!!!
