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The 6-Week Options Trading Kickstarter: What Are Options, and Why Should We Care About Them?

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Steve Smith breaks down the basics of options trading.

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Brokerage firms reap multiple benefits from options. Options transactions are typically more expensive than stock trades and also carry better profit margins. Also, by educating retail investors about the proper use of options, the brokerage firms are creating smarter customers that will do more trading over the long term, thus creating a virtuous growth cycle.

So let's start at the very beginning by learning what options are, and why we should care about them.

The Option Contract

We use the term "option contract" for a reason since an options transaction is literally a contract between the buyer and seller. Contracts come in two forms: puts and calls.

A call option gives the buyer the right, but not the obligation, to buy shares in a security at a specified price (known as the strike price) within a given time frame that ends on a specific date (which we call the expiration date).

On the other side of the trade, the seller of the call option has the obligation to sell said security at the specified strike price within the time frame. In a standard option, each contract represents 100 shares of the underlying equity.

For example, the buyer of an Apple September $600 call has the right to purchase 100 shares of Apple at $600 at anytime up to the September 22 expiration date, regardless of what price Apple shares are trading at the time.

The seller (also knows as the writer) of that September $600 call has the obligation to sell 100 shares of Apple at $600 at any point prior to the expiration date.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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