A stock option gives the buyer the right to buy stock at a certain price. It's called an option because the buyer has the “option” of buying the stock or of not buying stock. There are two basic different types of stock options. A call option gives the option buyer to buy stock and a put option gives the option buyer the right to sell stock.
A single call option contract gives the buyer the right to buy 100 shares of the stock in question and the single put option contract gives the buyer the right to sell 100 shares of the stock in question. The stock in question, be it Apple, IBM, etc. is also referred to as the underlying asset.
Options have become a popular trading vehicle for many due to the limited risk involved. Let's take a look at an example. Let's say for instance you purchase a single option contract for $1,000. If the market moves against you the most that you stand to lose is $1,000. Another reason that stock options have become attractive is because of the leverage involved. As the cost of the option contract is much less than the 100 shares of stock that it controls the option increases or decreases in value faster than that of the stock itself.
One key thing to keep in mind when trading stock options is that they all have an expiration date. This means that if you are anticipating a move in the underlying stock that particular move will need to occur prior to the expiration date. If you buy a call or put option and the price of the stock remains the same that option loses value over time. This time value is one of the things built into the price you pay for every option you buy. Typically the further away the expiration date the more expensive the stock option will be.
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