← BeginnerLesson 1 · 4:47
What is an option?
Summary
You can read the four parts of any option: what it is on, the strike price, the expiry date and the premium. You can say the most you could lose when you buy the right, before you pay, and work out your result on the last day. You can also explain how an option can go to zero while the stock stands still.
Key terms
- option
- A contract that gives you the right, but not the duty, to buy or sell something at a set price, up to a set date.
- contract
- The agreement an option is written on: what it's on, the strike price, the expiry date and the premium.
- right, not a duty
- The buyer of an option can use it or leave it, while the seller must follow through if asked.
- strike price
- The locked price in an option at which you can buy or sell.
- expiry date
- The last day an option is good for; after that it is finished.
- premium
- What you pay for an option, which you don't get back, and the most you can lose when you buy one.
Check yourself
Answer each question to see why the right answer is right.
1. In the sneaker deal, you pay the shop owner $10, and the owner promises to sell you the $200 sneakers at any time in the next 30 days. What is the $10?
2. What does it mean that an option is a right, not a duty, for the person who buys it?
3. You pay $3.45 for the right to buy one share of XYZ at $100 within 30 days. On the last day XYZ is at $110. What is your result?
4. Same option: the right to buy XYZ at $100, bought for $3.45. On the last day XYZ finishes at exactly $100. What is your result?
5. Where does XYZ have to finish on the last day just to get your $3.45 back?
Finished the video and the quiz? .