Basic:
Option comes with two type. Call option and Put Option.
Call Option: Gives the buyer right to purchase the shares at a targeted price.
Put Option: Gives the buyer right to sell the shares at a targeted price.
Example of an option:
AMD Jan 6 call @ 1.30
- This call option gives the buyer right to purchase shares at $6 (strike price).
- This is January option, which mean the right to purchase the shares at $6 will expire on the 3rd Friday of January.
- $1.30 for buyers means that, by paying $1.30 now. You are granted the right to purchase a shares of the underlying stock and since US market is counting by 100 shares for one contract. This buy will cost the buyer $130 to reserve the right for 100 shares of the underlying stock @ $6 x100 = $600.
i.e. Jan will be on the 3rd Friday on Jan, Feb call option will be on the 3rd Friday in Feb.
Expiration cycles:
Why do you think that sometimes you see this share with Option expiring on Jan, Feb, May, August? While some expire on Feb, March, June, and Sept.
This is because at anytime, there'll be four different expiration months listed for trading on any stock.
In total there's three cycles known as the January, the February, and the March cycles.
- Jan cycle: Jan, April, July, October
- Feb cycle: Feb, May, August, November
- March cycle: March, June, Sept, December
AMD shares trades in Jan cycle. If now we are in April, the four different expiration will be, April, May (current and next month), and July, October (the next two months in the Jan cycle).
To find out what cycle is the stock trading at, just pull out the option trading for that day and check the expiration months.
Find out here in Yahoo's Finance website. finance.yahoo.com
2 comments:
Wow..you trade options?? Seems very complex wor..You must be a smart guy :P
The right way to trade options is to buy a stock, the one that goes up and down a lot is the best one like Citibank you can get a 1000 shares for under 4k as we speak and then write a covered call option every time the stock takes a dive close the position, then wait for the stock to go back up write the covered call option again. the longer the time for the option to expire the more premium you will get. every time you make a profit buy more stock. this is a smart way to trade any low value risky stocks all the option symbols are available so you will not make any mistakes. a 1000 shares will let you write 10 covered call options, I like to play with leaps in the money options expiring 1-2 years from now. Happy trading
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