I have been thinking about how to make this easy and actionable for anyone interested to learn about options trading and I thought there is no better way to start than by demonstrating what an option would look like if written out like a real contract between two people. In the following posts of this series I’ll cover the more technical stuff in detail, but for now I’ll keep this post fun, simple and without too much jargon… Strip it down and an option is basically a deal between a buyer (buying a right) and a seller (selling an obligation). So let's write a hypothetical options contract out. Take your time to read it, because all the terms you’ll need are sitting inside the contract. (strike, premium, expiration, underlying) ———— Draft CALL Contract Theoretical (this is just for illustrative purposes to help you understand the concept): I, Moe the buyer of this call option contract, reserve the right, but not the obligation to buy 100 shares of ABCD (underlying) for $50 per share (Strike Price) valid until 21st January 2027. In exchange for this right I agree to pay a premium of $1.50 per share. I, Mr. Market the seller of this option contract am obligated to sell 100 shares of ABCD for a set price of $50 until 21st January 2027 if the buyer chooses to execute the terms of this contract. For this I will receive $1.50 per share in premium. End of contract. ———— Now some quick context and basics to help land this for you guys: 1. We have two types of options contracts CALLS (option to buy when price goes up) and PUTS (option to sell when a price goes down) 2. All options contracts for stocks and ETFs are for 100 shares (you don’t pay price of share you only pay for the premium per share in the example above that would be 100*$1.5 to own the right to purchase the stock at $50) 3. Every contract has a strike price at which the buyer can exercise the contract to buy or sell the shares 4. Every contract has an expiration date after which if the holder doesn’t exercise it expires worthless and the seller keeps the premium. This is post one in a six post series, feel free to drop questions or feedback in the comments below and I’ll answer everything. Hope this was easy to follow for anyone looking to explore options and there is a real option contract example in the image attached.
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22 Comments
Marsia @gnomishness · 1dEdited
Thank you for explaining this visually, because when I read most explanations of options trading, I feel my pulse start to race, and I quickly move on to something else before I start to feel overwhelmed. I don’t plan on doing this any time soon, but it’s good to learn!
Michelle Womack@spartangreen · 1d
I have read 3x but what I get hung up on is minimum amount of shares for 1 contract is 100…. If I had the $$ I would put it on a sure bet and I am not sure enough (or have the liquidity) to put that kinda money on anything except a penny stock…. Yikes, I am a low roller Moe 😳😳
Nate
@hoodnate · 10h
Framing it as deal between two people made this click for me. I always mixed up who holds the right and who holds the obligation, and now it is clear. Excited for the rest of the series.
Blair
@tackaberry17 · 1d
Nice job Moe - I love the very large torque you can get from a relatively small investment. Your $MGM or my $LVS would be a good PUT example 😉
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