Options Trading Basics
A comprehensive introduction to the world of options for beginners and advanced traders.
What Are Options?
Options are financial derivatives that give the buyer the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (strike) before or on a specific date (expiration).
Call Option
A call option gives the buyer the right to buy the underlying asset at the strike price. Buyers profit from rising prices.
Put Option
A put option gives the buyer the right to sell the underlying asset at the strike price. Buyers profit from falling prices.
Strike Price (Exercise Price)
The predetermined price at which the underlying asset can be bought or sold when the option is exercised.
Expiration Date
The date by which the option can be exercised. After this date, the option expires worthless if not exercised.
Option Premium
The price the buyer pays for the option. The premium consists of intrinsic value and time value.
Practical Example
Buying a Call Option
Underlying: BMW stock, current price €100
Strike: 105 €
Expiration: 3 months
Premium: 3 € per share
Scenarios:
- Price rises to €115: Profit of €7 per share (115 - 105 - 3)
- Price stays at €100: Option expires, loss of €3 (premium)
- Price falls to €90: Option expires, loss of €3 (premium)
Key Takeaways
- ✓Options give the right, but not the obligation, to buy/sell
- ✓Maximum risk for buyers is limited to the premium
- ✓Options expire worthless if they are not in the money
- ✓One option contract typically covers 100 shares