What Are Stock Options?
Stock options allow traders or investors to speculate on moves in most stocks under a specific time period. Briefing.com publishes unusual options activity twice daily because activity in the options market sometimes foreshadows movements in the underlying securities. Options contracts for equities expire on the third Friday of every month. There are two distinct types of options.
Call Options
A call option is a bullish trading position.
When a trader purchases a call option, he or she is purchasing the right to purchase stock from the seller of those call options at a specific strike price.
Each call option gives the right for 100 shares of stock. For example, if a trader purchases ten call options, he or she has a right to purchase 1000 shares of the underlying stock at the strike price after expiration.
Someone may want to sell a call option to earn some extra income by collecting the premium that is paid by the buyer of the call option. The premium is the price of an option contract, and it becomes income for the seller of the call option whether the strike price on the option contract is hit or not
Example: Let’s say that Apple is trading at $190/share before earnings and a trader purchases a December $195 call option. Apple posts a strong quarter and the underlying stock trades up to $210/share. The buyer of the call option has the right to buy stock at $195/share at expiration. He or she can sell it for a quick profit of $15/share in the open market. The seller of the call option loses in that scenario because he or she will sell shares at $195/share even though the underlying stock is $210/share. The seller of the call option, though, keeps the premium paid by the buyer of the call option.
Put Options
A put option is a bearish trading position.
When a trader purchases a put option, he or she is purchasing the right to sell stock to the seller of those put options at a specific strike price.
Each put option gives the right for 100 shares of stock. For example, if a trader purchases ten put options, he or she has the right to sell 1000 shares of the underlying stock to the person who sold those put options after options expire. If that person does not have any stock to sell, he or she will need to purchase the stock in the open market.
Someone may want to sell a put option, because they feel the stock will not go below a certain price and they can earn some extra income by collecting the premium paid by the buyer of the put option.
Example: Let’s say Apple is trading at $190/share before earnings and a trader purchases a $185/share put option. Apple posts a disappointing quarter and the stock drops to $170/share. The buyer of the put option will have the right to sell the stock at $185/share even though the underlying security is trading at $170/share. If the trader does not have stock, they can purchase at $170/share in the open market and sell at $185/share using the put option, thus making a $15/share profit. The seller of the put loses in this scenario because he or she will have to purchase shares at $185/share even though the underlying security is trading at $170/share. The seller of the put option, though, keeps the premium paid by the buyer of the put option.
Speculation
Normally traders do not wait until expiration to take profits on their option positions. Therefore, if a trader sells their current position, they have no rights or obligations at expiration (as explained above). Traders can profit on options if the value of the option increases faster than the time decay of those options. As a contract gets closer to expiration, it is worth less if the strike price is far away from where the stock is trading. For example, let’s say Apple (AAPL) Dec $200 calls were trading at $1.00 on December 1. These calls will expire on December 17. If Apple is trading above $200, those options will have value, but if Apple trades under $200 on December 17, those options will have no value.
