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Option Contract Specifics - Options Mechanics - Options Trading For Beginners - YouTube
Channel: Option Alpha
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Hey, everyone.
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This is Kirk here again at Option Alpha.
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In this video, we're going to go through option
contracts specifics.
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There are essentially five parts to an options
contract.
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These are the "choices" that we've talked
about previously in other videos.
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I think it's really important that we go through
this again as we kind of wrap up part one
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in track one here, and start laying the foundation
again for what we're going to start getting
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into a little bit more as we go deeper and
deeper into this beginner track.
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Here's an example of a basic options contract.
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Again, we'll go through in this video kind
of the differences between all of these five
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parts or things that can move.
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This is probably going to be one of the last
times that you'll see actually in this track
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us use like a graphic example.
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That's because we'll start to really get into
platform specifics, and looking at real-time
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trades and real-time examples here in this
track, which will help you get more familiar
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with what you're eventually going to be doing,
because you're not always going to be looking
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at graphics like this.
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Here's the thing.
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There's five parts to this contract.
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The first part or the one that we're parting
to here is the actual stock.
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This is the actual security that we're going
to end up trading, in this case, XYZ.
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This could be anything.
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It could be Apple, AAPL, CMG, which is Chipotle,
SPY, which is the S&P 500 ETF.
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This part of the option order is the actual
contract that everything hinges off of.
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Remember, an options contract is just an agreement
to buy yourself stock.
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This tells us what we're actually going to
be buying or selling.
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Part number two of an option contract is the
expiration date.
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This is the date in which we say that this
contract expires or no longer has any value
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or at least extrinsic value.
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In this case, it could be August.
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We didn't put a date here because I don't
want to pigeonhole you into any particular
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date.
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Usually, what this will say is like AUG16,
which is August of 2016, or AUG17, which is
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August of 2016.
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There's got to be some sort of date factor
that tells you when the contract expires.
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Different brokers are going to show it different
ways, but that's usually the next part of
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a contract.
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You got to know what the stock is, and then
you got to know when the expiration date is.
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Part number three of the contract is your
strike price.
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This is the price at which you agree to either
buy or sell the underlying stock in the future.
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In this case, for this example, the strike
price is 70.
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Now, remember, this is not the price at which
the stock is trading at right now.
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XYZ might be trading at let's say $50 per
share right now, but our strike price in this
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case, if we're buying a call option or selling
a call option is $70.
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That becomes the future agreement, or in the
case that I like to say, the price at which
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you strike a deal with somebody, that's the
number right here, which is 70.
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That's the third part of the option contract
order.
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The fourth part is the type.
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This is really simply comes down to are we
trading calls or are we trading put options.
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There's only two types of options, calls or
puts.
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This is where you'll see if the 70 strike
is either on the right-hand side of the option
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pricing table, which is the put options, or
on the left-hand side of the options pricing
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table, which is the call options.
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Again, call or put.
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Very simple and easy.
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The last and fifth part of an option contract
is the premium that is paid or received by
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either party.
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In this case, this is premium.
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I think I spelled that right [inaudible 00:03:51]
a little antiquated here.
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The premium that is received or paid to the
buyer or the seller.
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In this case, if you're an option buyer, you
would be paying #3.10 for this option contract.
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If you're an option seller, you'd be receiving
$3.10 for this option contract.
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It's important to note right off the bat,
we'll try to do this a couple more times in
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this track that we have here at Option Alpha.
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Premiums and option contracts have usually
about $100 or a 100 point multiplier, meaning
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that whenever you see a premium of let's say
3.10, it's actually or the true value of that
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contract is actually multiplied by the options
multiplier, meaning that the value of that
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contract actually is $310.
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It's $3 and 10 cents.
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That's the way it shows in broker platforms,
but the value, the actual total dollar amount
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is $310 for that contract.
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Now, this would be the same if an option contract
was showing a price of 0.25 or 25 cents.
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It's not that it's actually worth 25 cents.
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That's actually worth about $25.
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Quick little note there.
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Again, we'll go over it in more detail later
on.
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Hopefully, this gives you a good basis for
understanding just the contract specifics.
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It will get easier as we go through more and
more examples.
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Again, this video is meant to be here to lay
the foundation for what is involved, and builds
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on what we already talked about with what
an options contract is, what the parts of
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the contract are.
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Now, as we get further through the track,
we'll get a little bit more specific on buying
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puts versus selling puts, buying calls versus
selling calls, etc. to help continue to speed
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up your learning process here.
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As always, hope you guys enjoy these videos.
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If you have any comments or questions, please
ask them in the comment box right below.
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