If there is one thing about option trading that really bothers me, it’s the tendency of the business to make things way more complicated than they actually are.
At the core, option trading is very simply. However, many option traders and the option industry itself tends to over complicate things to the point of confusing traders new to the field.
Option trading strategies are spoken about with strange, high mathematics sounding Greek terms. Even stock option quotes are presented in symbolic form that makes it seem like you need a PhD. to understand.
In order to combat this tendency toward complexity for no reason, my articles will present option trading ideas in simple terms so that anyone can easily learn the business. You see, I strongly believe that the financial markets should be open to anyone and everyone with the desire to create a better life. Options, due to their low cost and high profit potential, are the perfect tool for nearly everyone regardless of account size.
Let’s start at the beginning:
The most basic option strategy is the simple purchase of a PUT or a CALL.
A PUT is purchased if the underlying stock is expected to fall in value.
A CALL is purchased if the underlying stock is expected to climb in value.
Each option represents 100 shares of the stock and has a limited lifespan.
Options are represented in a code like structure that consists of the root symbol + expiration month code + strike price. These terms are easy to remember, here’s what they mean.
The root symbol refers to the stock symbol but is not the same as the ticker symbol.
Root symbols can be found by looking at the options available for each stock via your broker or one of the many free option information services on the web. Yahoo Finance has an excellent presentation of all the options available for any given stock by clicking on the “options” tab
The expiration month code is the code for the month the option expires—January through December. Options normally expire around the 15th of each month for that month. Strike Price is the price where the option begins to have intrinsic value, meaning actual worth and simply not just time value.
If the option has a strike price greater than the price of the stock, a PUT is said to be “ in the money” and a CALL would be “out of the money” and vice versa. Here is a grid showing the codes, thanks to YAHOO FINANCE for the graphic:
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Source: http://tradingtips.com/daily/options-trading/options-really-simple/