Frequently Asked Questions
"Frequently Asked Questions"
Frequently Asked Questions on General Options Characteristics
What is an Option?
An option is a contract between a buyer and a seller which grant the buyer the right, but not the obligation, to buy or sell the underlying at a predetermined strike price and time. Stock option contracts generally are for 100 shares of the underlying stock. There are two types of options, calls and puts.
What is a Call Option?
Call option grant the holder (buyer) of the option the right (but not obligation) to purchase the underlying predetermined strike price and time. Conversely, the seller has to fulfill the obligation to sell the underlying should the buyer exercise his rights.
What is a Put Option?
Put option grant the holder (buyer) the right (but not obligation), to sell the underlying at a predetermined strike price and time. Conversely, the seller to fulfill the obligation to purchase the underlying should the buyer exercise his rights.
What’s a Strike Price?
It refers to the price in which the option buyer gets to purchase or sell the underlying instrument for.
What’s Option Premium?
The premium is the price of the option contract which is paid by the buyer to the seller.
What’s the Contract Size of an Equity Option?
It represents an underlying of 100 shares.
What happens if the stock splits, say, 2 for 1?
When a stock splits 2 for 1, the option holder will end up with 2 option contracts at 1/2 the strike prices.
What is Open Interest?
Refers to the number of option contracts that were initiated and remain open for a particular underlying instrument.
What’s Expiration Date?
The final day on which an option may be exercised.
What do “In-the-Money”, “At-the-Money” and “Out-of-Money” mean?
In-the-money: An option that generates a profit when exercised.
At-the-money: An option in which the strike price is equal to the current market price of the stock.
Out-of- the-Money: Options which has zero intrinsic value. An option with a strike price higher than the market price for calls and below the market price for puts.
Frequently Asked Questions on Option Trading
What are the approaches to Option Trading?
There are two primary approaches, i.e. fundamental and technical analysis.
Fundamental analysis concentrate on companies’ financial standing such as P/E ratio, earnings growth potentials and leverage etc.
Technical analysis focuses on technical indicators such as support/resistance, MACD, breakout/pivotal points etc, and is usually more short term in nature.
What is a Net Credit?
A net credit refers to the money that you received after initiating an option trade.
What is a Net Debit?
A net debit refers to the money that you payout after initiating an option trade.
What is Risk-Reward Ratio?
It refers to the relationship between the maximum potential risk and potential reward of a trade initiated.
Frequently Asked Questions - General
What is a Naked Position?
A securities position that is not hedged from market risk.
Who is the Market Maker?
An exchange member that buy and sell shares or contracts in a designated market. Market makers must be ready to both buy and sell in order to facilitate trading, especially in an illiquid market to keep the market somewhat liquid.
For other questions that are not covered in the above list, please contact us directly at support <at> option-income.com
| 
