WHAT IS A STOCK OPTION?

Copy of canstockphoto49786261

OPTION:

The right (not the obligation) to buy or sell a

SPECIFIC STOCK at a certain PRICE for a limited TIME.

****ONE Option Contract = ONE HUNDRED Shares of Stock****

Question: An Option:
1.___ Obligates you to buy the underlying stock
2.___Has an expiration date.
3.___ Can only be bought.

Answer: 2

****CALLS****
When you Think the Stock Will Go Up

We’ll place an order for some snow shovels. First, lets take a look at Snow
Shovels Inc.’s OPTION CHAIN.

Handout 1

1. Every stock has an Option Chain
(Future section on how to read an Option Chain)

2. Every Option Chain has a list of Expiration Dates.

3. Every Expiration Date has a list of Strike Prices

4. Every Strike Price has a daily Bid and Ask, high/low Option Premium Price.

canstockphoto8448499Hardware Store Co. forecasts that in
NOVEMBER they will need a lot of snow shovels.
In JUNE, Hardware Store Co. buys one Option
with Shovels Inc. to provide 100 snow
shovels for $10 each (resale value $40)
until 3rd Friday in NOVEMBER for $157.

Sample of an option listing: “Buy 1 SHOV November Call 10.00 @ 1.57”
Can you find “10.00” and “1.57” on SHOV Option Chain above?

Snows in NOVEMBER. Hardware Store Co. pays Shovels Inc.
$1,000 for 100 snow shovels (plus the $157 option, which they already
paid upfront) = $1,157 total cost.

Hardware Store Co. sells the shovels for $40 each = $4,000
Minus $1,157 cost = $2,843 profit.

1.How much profit did Hardware Co. make when it snowed?
A.___Zero, he needed more shovels.
B.___He lost customers and $157.
C.___He made $2,843 profit.

2. How much did Hardware Co. pay Shovels Inc. for 100 shovels?
A.___$1,157
B.___$1,000
C.___$157.00

3. One Option equals how many snow shovels (shares of stock)?
A.___10
B.___157
C.___100

Answers: 1: C — 2: A — 3: C
Let’s look at another CALL option:

canstockphoto10328587General Motors stock share price is $88.16
GM is coming out with a self driving car

You think the stock price will go up and buy a
DECEMBER $87.50 CALL @ $2.81.
To make a profit, GM will have to pass $87.50

Buy 1 GM December Call 87.50 @ 2.81
(1 contract = 100 shares X 2.81 = $281.00

GM stock price goes up to $90.50
Sell 1 GM December Call 87.50 @ 4.41
You have profited by $160.00
(4.41 minus 2.81=1.60 X 100 = $160.00
1. How much did one GM Call contract
for 100 shares
cost to buy?
A.__$2.81
B.___$87,50
C.___$281.00

2. How much did you sell one GM contract for?
A.___$4.41
B.___$441.00 for 100 shares
C.___$90.50

3. Did you make a profit or loss?
A.___I’m in a hole on this one
B.___Only a measly $1.60
C.___$160.00 (1.60 X 100)
ANSWERS:
1–C
2–B
3–C

The Following is similar to a CALL option:

canstockphoto34769162AUGUST: House for sale at $100,000
You haven’t sold your house yet.
Owner will hold new house @ $100,000 until
DECEMBER 15 for a fee (option)of $1,400.

Buyer sells his house in NOVEMBER. Price of new house has increased
to $120,000. Buyer has an option until DECEMBER 15
and can still buy the house for $100,000;
(Plus the upfront $1,400 cost of the option)
How much did Buyer pay for new $120,000 house?
A.___$120,000
B.___$118,600
C.___$101,400
Answer: C
After BUYING A CALL you have three choices:
1. Sell the Call for a profit
2. Exercise and buy the stock
3. Sell for a loss, or allow the option to expire worthless
Question: You have three choices after buying a call:
A.___Exchange it for another company’s stock
B.___Trade it in for a new one
C. ___Sell the call
D.___Exchange it for a Put
Answer: C

canstockphoto2188921PUTS

When you think the UNDERLYING STOCK will go DOWN.

General Electric stock price is s$81.20
GE is exiting the appliance business and you think the stock will go down.
Buy 1 GE Jan Put $80 @ 70¢
1 contract = 100 shares X 70 cents = $70.00

GE stock price goes down to $78.20

Sell 1 GE January PUT $80 @ 90¢
To open the order, you paid 70¢ X 100 shares=$70.00
To close this order, you received 90¢ X 100 shares = $90.00

Question: How much profit did you make?
A.___$80.00
B.___$78.20
C.___$20.00
How did you calculate that profit?

A.___$80 minus $78.20
B.___70¢ plus 90 ¢
C.__90¢ minus 70¢ X 100
Answers: 1. — C, 2.– C

Let’s take a coffee break

Starbucks stock share price is $40.00. Coffee beans have skyrocketed in price and Starbucks is losing money.
You think the stock price will go down, so you buy a put.

canstockphoto21251154You buy a December $38 PUT @ $2.00
To make a profit, the faster and further the stock declines,
the more valuable your PUT option becomes
Buy 1 SBUX December Put 38 @ 2.00
(1 contract = 100 shares X 2.00 = $200.00)

SBUX stock price goes down to $36.00
Sell 1 SBUX December Put 38 @ 3.50
You have profited by $150.00
QUESTIONS
1.Why did you buy a 38.00 Put?
A.___I think the stock will go to $38 or lower
B.___I want to make $38.00 profit
C.___I like coffee

2.How much is the PREMIUM @ the stock price of $36.00?
A.___$1.50
B.___$3.60
C.___$3.50

3.How did you calculate a $150 profit?
A.___$3.50 minus $2.00 X 100
B.___$2.00 plus $3.50
C.___$40.00 minus $38.00
ANSWERS
1.– A, 2.– C, 3.– A

After BUYING A PUT, you have three choices:
1. Sell the put

2.Do nothing and it will expire

3.Exercise and convert your option into a Short Position and then sell.
(“Short a stock” = You borrow stock and immediately
sell it – hoping you can buy it at a lower price and return
it to the lender and pocket the profit.)

SO WHAT’S SO GREAT ABOUT AN OPTION??

ANSWER: 10% vs 181.5% return !

STOCKS vs OPTIONS
Disney (DIS) Stock @ $111.75

Disney STOCK:

Buy per share @ $111.75 X 100 shares = $11,175.00

Sell @ 10% increase: $122.93 X 100 = $112,203.00
($122.93 minus $111.75 = $11.18)

Increase per share = $11.l8 X 100 shares = $1,118.00 Profit

Stock % Gain = 10%

Disney OPTION:

Buy $110 Call option: $2.60 premium X 100 shares = $260.00

Sell Call @ 10% stock increase: $7.32 premium X 100 = $732.00

($7.32 minus $2.60 = $4.72)

(Option increased 20 – 30% on 10% stock increase)

Increase per option = $4.72 X 100 = Profit: $472.00

Option % Gain = 181.5%

Stock Investment: $11,175.00 – 10%

Option Investment: $260.00 – 181.5%

 

 

Please scroll way down to: “How a Stock and Option are Linked”

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