Facts about Stock Options
Facts about Stock Options
It is always better to know more about a certain subject before investing your time, money and effort into it. This logic goes true for both stock trading and stock options. Before deciding to go and try out the stock options, here are a few facts that you should know.
You probably know that there are two kinds of stock options: the call and the put and that the call stock option gives you the option to buy shares of stock, within a specified period whereas a put stock option allows you to sell stocks at a given specified period. Every stock option has the underlying stock, strike price, expiration period and premium. The major actors in stock option are the writer, the holder and the entity engaged in regulating the buying and selling of stock options: the Options Clearing Corporation. You also know that for each stock option, which has 100 shares of stock each, the premium is anywhere between $0.03 to $0.05 or higher per stock. You may be wondering how this premium price came about.
In stock options, there are two things to consider in determining the premium for each stock: the intrinsic value and the time value. The intrinsic value has been defined as the difference between the stock’s fair market value and the strike price. The intrinsic value is always positive. Hence, if the current share price per stock is $30 and the strike price is $28 then the $2 difference is the intrinsic value of the stock option. If the share price and strike price are the same then the stock option has no intrinsic value but purely time value. The time value is the amount that you pay to compensate for the possibility that the share price will change in your favor. This means that for the premium of $0.05 per share that you pay, part of it is for the chance that the stock price would increase from $30 to may be $35 within the next three months.
Stock options currently have different styles. There are three styles of stock option that are dependent on the period of their exercise and have nothing to do with nationality. The three types of style of stock options are the Capped, American and European Styles. In the American styled stock option, the holder of the stock option can exercise the option anytime before the expiration date. In the European style stock option, the holder can exercise the option for only a period before the expiration date whereas in the Capped style, the option can be exercised for a period before expiration but if the value of the option reaches a specified value then the option is automatically exercised.
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