BASICS YOU MUST KNOW ABOUT STOCK OPTIONS – Lesson 4

4 THINGS YOU HAVE TO KNOW !

#1 – There are only two types of options:
CALL – “going long” – you believe the stock will go up
PUT – “taking a short position”-you believe the stock will go down
AND
With these 2 types (Call and Put)
you can only take 2 ACTIONS:
BUY ….or ….SELL

Question 1. There are two types of options:
A.___Bids and asks
B.___Forward and Backward
C.___Calls and Puts.

Question 2. What actions can you take
when ordering options?
A.___Deposit an IRA
B.___Buy or Sell
C.___List On Craigslist.

Answers: 1.- C. 2. – B

#2 – STRIKE PRICE:
The fixed price at which you can buy
or sell the underlying stock.
Buy 1 McD December call 15.00 @ 3.00
(Strike Price is $15.00)

Question 3. The strike price:
A.___Is significant in baseball.
B.___Wins on Jeopardy
C.___Is a fixed amount you can buy or sell

#3 – PREMIUM:
The price you paid or received for an option contract.
Buy 2 GM December Call 100 @ 7.00 ($7.00 is the Premium)

We are “PREMIUM” entrepreneurs – we place option spreads
to COLLECT PREMIUM.

Question 4. The Option Premium :
A.___The amount you paid or received for a contract
B.___is prevalent at upscale discount malls.
C.___is a grade of coffee at Starbucks.

#4 – EXPIRATION DATE:

On the 3rd Friday of the month, I disappear forever!
The Expiration Date is shown on every option contract
As soon as you buy or sell an option contract, the clock starts ticking.
Sell 1 SBUX December Put 40 @ 3.50 (December is Expiration Date)

Question 5. The Expiration Date:
A.___There is only one option expiration date for each stock
B.___last indefinitely until the company is sold
C.___Expires the third Friday of a month

Answers: #1 – C — #2 – B –#3 – C –#4 – A — #5- C #6 — B

ONE MORE THING …
The option market words for “BUY” and “SELL” are:
“BID” (Sell)
Sell/”BID” = Is the lowest priced SELL order that is available

The BID will always be displayed on the
LEFT in the Option Chain

“ASK” (Buy) Is the price that a seller is “Asking” for the Option

The ASK will always be displayed on the RIGHT in the Option Chain.

If you wanted to phone a Broker to place an options order,
you would say: “I want to Buy one Starbucks December 40 Put
for a limit price of $3.50 for the Day.”

Question 6. The option words for buy and sell are:
A.___unimportant when placing an order
B.___Ask and Bid
C.___Hit and Stand

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