HOW A STOCK AND OPTION ARE LINKED – Lesson 6

The option market is the stock market’s

central nervous system.

How an Option Contract and
Underlying Stock are linked:

One Option Contract = 100 Shares of Stock

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Options are “Derivatives” – meaning they “DERIVE”

their value from the underlying stock.

An option is just a paper contract.
That contract must be LINKED to a
stock of some company, which is called the
UNDERLYING STOCK.

Underlying stock: “Without me, you’re nothing!”

Question:

1.An option contract and an underlying stock are linked because:

A.___you receive 100 options for one share of stock
B.___an option and a share of stock cost the same
C.___an option is derived from the stock share price.

THE SECRET

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Buy a Company’s Stock Who You Like —
and Who You Wouldn’t Mind Giving Your Credit Card To.

The underlying stock and option move together.
Where the stock goes, the option follows.

Question:

2.The underlying stock and the stock option:

A.___move together
B.___each go their own separate ways
C.___are not related in any way.

A popular selection method is to use a one-year
“rolling stock chart” and select options as the stock dips,
confident it will peak back up.

Copy of Copy of Handout 1B

Pass on stocks that are just chugging along
in a bumpy horizontal straight line.

Keep it simple – To find out the weather;
why use barometric pressure, moon signs, or a meteorologist
–when you can just look out the window?

Another method to select a stock option is to keep alert to what insiders are buying and selling.

https://www.insidearbitrage.com/introduction-to-insider-trading/ This site provides weekly details of large stock buying and selling by company insiders. It seems logical that if owners of a company are buying/selling their own stock, they must know something we don’t know.

Question:

3. What is one secret to selecting an underlying stock?

A.___A tip from an employee in Walmart
B. ___If the stock is a Penny stock
C.___ Stock share price has fluctuated in the last year.

BEWARE OF CONFUSING CONTRACTS AND SHARES!

One Option Contract = 100 Shares of the Underlying Stock.

100 Option Contracts = 10,000 Shares of Underlying Stock!

Question:

4. Ten option contracts equal:

A.___ 10 shares underlying stock
B.___ 1,000 shares underlying stock
C.___ 10,000 shares underlying stock

Answers: 1 –C;    2 –A;   3 –C;    4 — B

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Each week I analyze a HOT stock/option pick,

with a touch of animated humor, and explore

behind the scenes influence on the stock price –

facts for the savvy trader to overpower the

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