; Basics of Stock Options Explained - Strike Price, Option Premium and Expiry Date
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Basics of Stock Options Explained - Strike Price, Option Premium and Expiry Date

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                <p>For a better understanding of the options trading, it
is important to get basic elements of stock options explained in greater
detail. Clear understanding of basic elements that build up the total
option trading system is very important for realizing complex
implementations of them. If you do not know exactly what strike price is
or how options premium is charged, you might end up taking a wrong
decision which may ruin your entire trade operation.</p>
<p>As you've already know, options are simply contracts of future
purchase of stocks at a specific price, giving one party the right and
another party the obligation to buy or sell some stocks in the future.
This contract contains some specific parameters which are basics of
options trading. Here, we will get these parameters of stock options
explained one by one.</p>
<p>But before getting the basics of stock options explained, let's take a
look on the types of the options. There are two types, one is call
option, which gives the owner of the contract the right to buy the
stocks, and another is a put option which gives the owner of the contract
the right to sell the stocks.</p>
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<p>Now, the first element in an option is the strike price. It is the
price in which both parties agree on selling or buying the stocks. This
price is fixed when the option is issued and does not change with the
change of the stock's actual market price. Usually, for call options the
strike price is set to a price little higher than the price of the stock
during the time the option is written. For put options, it is set lower.
But sometimes the strike price can be set to the equal value of the stock
during the writing of the option. Owners of option have the right to,
according to the type of option, buy or sell the stocks at the strike
price, or let the option expire. Usually, strike price is defined per
single stock, but the option itself comes for a bundle of 100 stocks. In
that case the total strike price is 100 times the price defined in the
contract and is for buying or selling 100s of the underlying stock.</p>
<p>The premium of the option is the price of the contract. It is not any
part of the price for the underlying stocks. If the option is exercised,
the amount of profit is determined by adjusting this premium with the
difference of prices of the stock. If the option is not exercised, the
premium is non-refundable and it is the gain to the option seller. The
premium can be fixed price or can be monthly payments. Usually, the
premiums are also mentioned for single stocks but are applied to a bulk
of 100 stocks.</p>
<p>The last thing that defines an option is the expiry date. It is the
date before which the option is to be exercised. If the option is not
exercised before this date, the option holder loses the right defined in
the contract and the option is rendered useless. Usually, expiry dates
are only mentioned by month and in that case, the actual date is the
third Friday of that month.</p>
<p>So, knowing every detail and characteristics of these above basic
elements of options trading is the key to getting stock options explained
at higher level. If you need more information on these topics, consulting
licensed firms and brokers is a good idea along with searching for more
information on the web.</p>                <!--INFOLINKS_OFF-->
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