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


Steve Smith breaks down the basics of options trading.

Put options that have strikes that are above the current stock price have intrinsic value. Those below the current price have only extrinsic value.

Options that have intrinsic value are said to be "in-the-money," while those strikes above the current stock price and whose value is solely extrinsic are said to be "out-of-the-money." If an option expires out-of-the money, it is worthless and all rights and obligations cease.

Insurance Analogy

It is interesting to note that quite a bit of options terminology overlaps with that of the insurance industry. An option's price or value is referred to as its premium (like an insurance premium). The purchaser of an option has losses limited to the amount of the premium. The seller of an option is regarded as a writer (like an insurance underwriter). And an option's expiration date is analogous to a term insurance policy.

The insurance analogy crosses over to options pricing.

It costs a lot of money to insure a house sitting on a fault line in San Francisco.
No positions in stocks mentioned.

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