Options
An option is an agreement between two parties: a seller (also called a writer) and a buyer. With a call option, the buyer purchases the right to buy a stock or an asset from the writer at a specific price before a predetermined expiration date. With a put, the buyer purchases the right to sell a stock to the writer at a specific price before a predetermined expiration date.
The amount paid for the option is the option price, or option premium. The agreed upon price for the stock, should the buyer decide to exercise the option, is the strike price.
Let’s look at a few examples.
Say you bought a call with a strike price of $50. The stock is now valued at $55 on the market. This difference of $5 is called the intrinsic value of the option. In other words, if you now exercise your call option and buy the stock at $50, you will realize a $5 gain if you immediately sell the stock on the market.
When you buy a put, you want the strike price to be higher than the stock price. For instance, if the strike price of a put is $50 and the stock is selling for $45, then the put has an intrinsic value of $5. In this situation, if you exercise the put option and sell the stock to the writer for $50, you could then buy the stock on the market for $45 and realize a $5 gain.
When the intrinsic value of a call or put is greater than zero, the option is in the money, because exercising the option would constitute a gain. When the strike price is equal to the stock price, the option is at the money. And finally, if exercising the option would constitute a loss, then it is out of the money. A put option is out of the money if the strike price is less than t