What is a stock option?
An option is a standardized contract that trades alongside stocks on the major exchanges. Stock options are the source of The Takeover Alert’s biggest gains — a fact that tends to intimidate new readers. That’s because they’ve been led to believe options are complicated and risky… so they want nothing to do with them.
But the truth is options aren’t so tricky once you understand them.
You can use a broker to buy and sell an option just like a stock. And like stocks, the price goes up and down in response to market conditions.
The biggest difference between stock trading and options trading is what you’re trading. Stocks shares, of course, represent part ownership in a company. When you buy a stock, you buy a part of the company. When you sell your stock, you give up that ownership.
Options are a little different. An options contract gives its owner the right, but not the obligation, to buy or sell a stock at a predetermined price by a predetermined date.
The predetermined price is called a strike price, and the predetermined date is called the expiration date.
Every option covers 100 shares of stock. The option’s price — how you pay for it — is called the premium.
You can learn more about the basics of options by clicking here.
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