When people have extra money they want to invest, they can do so by buying stock options. Hopefully this article can give you the basics of how stock options work.

First, what are stock options?

It is an agreement between two parties. This contract gives the buyer the right to buy or sell a share at a certain price. The buyer can exercise this right up to an agreed expiration date.

What gives the buyer the right to buy a stock is called a “call.” The option that gives the buyer the right to sell a stock is called a “put.” And these options can be used at any time until the expiration date.

Stock options generally come in groups of 100 shares. The group of 100 is known as a “batch”. And the price at which lots are bought or sold is known as the “strike price”.

Here is an example of a stock put option:

Suppose you want to buy a stock option on the Ramey company. Let’s say the share price is $210. So, you buy a stock put option (equivalent to 100 shares) at a strike price of $200. And let’s say this option expires in six months.

If the Ramey Company stock price falls to $190 before the six months are up, you can exercise your right to sell the option, equal to 100 Ramey Company shares at the original exercise price of $200. You can do this at any time before the expiration date.

That is, when Ramey Company stock is at $190 per share, you can buy 100 shares at $190 and sell them at $200 per share. Therefore, you make a profit of $10 per share, even though the stock price went down.

Now here is an example of a stock option.

Let’s use the Ramey company example above, except you’re buying a call option for $200. And let’s say this time, the stock price goes up to $300. Now what you can do is exercise your option to buy 100 shares of Ramey Company at $200 and then sell them at $300!

Things to keep in mind:

If you buy a call option and the stock price never rises above the strike price, the option will be worthless once the expiration date is reached. And of course this is true for a put option: if the stock price never falls below the strike price, the option will be worthless at the time of the expiration date.

And, of course, there is the cost of the option itself. This is called the “premium” of the option.

There are many places to learn more about stock options. It is suggested that you go online to the various websites that discuss stock and options trading before you get too involved. And make sure you’re not spending money you can’t afford to lose. Good luck!