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How Options Work

How options work. In order to understand how do options work, here are some key terms you must first know:

Call Options

Call options give the buyer the right but not the obligation to purchase the underlying asset. Buying a call option is a bullish strategy: a call option increases in value when the underlying asset rises in price, and loses value when the underlying asset falls in price.

Call option Moneyness

Depending on the market price of the underlying asset, here are some technical terms you should understand:

In-the-Money – The market price of the underlying asset is more than the strike price.
At-the-Money – The market price of the underlying asset is the same as the strike price
Out-of-the-Money – The market price of the underlying asset is less than the strike price

Put Options

Put options give the buyer the right but not the obligation to sell the underlying asset. Buying a put option is a bearish strategy: a put option increases in value when the underlying asset falls in price, and loses value when the underlying asset rises in price.

Put option Moneyness

As with call options, depending on the market price of the underlying asset, here are technical terms related to put options:

In-the-money – The market price of the underlying asset is less than the strike price
At-the-money – The market price of the underlying asset is the same as the strike price
Out-of-the-money – The market price of the underlying asset is more than the strike price

Long-term equity anticipation securities (LEAPS)

What are LEAPS? Long-term equity anticipation securities are long-term options that exhibit the same characteristics as normal options, with the exception that LEAPS have a much longer time to expiry. Some long-term equity anticipation securities can have expiration terms of more than two and a half years.

Option Chains

What are option chains? Widely available for free on the internet, They are tools which offer crucial details for a number of options: the current market prices, liquidity, available strike prices, time to expiry.

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