This moomoo news team introduction to options is designed to help you become familiar with some basic Wall Street concepts and the fundamentals of call and put options. 

-Moomoo News Team

The fact that options are widely regarded as risky is ironic, as options were originally designed as risk management tools. Like any tool, one must learn how to use options. For the most part, brokers are right in advising their clients to stay away from options. They know most will want to grab the tool without learning how to use it. 

However, once a person is properly educated on the proper use of these risk management tools, options can be the quickest, easiest, and safest route to financial success in the financial markets. Then let's begin...

Ancient Roots of Options Contracts

Although many believe options are a  recent innovation,  they actually date back thousands of years as options originated as risk-management tools. 

Evidence that the use of option contracts was standard in ancient times appears during the Greek civilization. All option contracts that trade on U.S. exchanges are issued, guaranteed, and cleared by the Options Clearing Corporation (OCC). Founded in 1973, OCC is a stand-alone clearinghouse that issues and clears options and futures on common stocks, indices, currencies, and interest rate composites listed on 12 participating exchanges, of which five are shareholders. 

Since July 18, 2012,  and as part of the Dodd-Frank financial overhaul, OCC has designated a systemically important financial market utility. As such, the Federal Reserve has become a third regulator, along with the Commodity Futures Trading Commission and the Securities and Exchange Commission, with some form of a supervisory role. 

Definition

A stock option is a contract that gives the holder the right to buy (a call) or sell (a put) on a particular stock, at a predetermined price (the strike price), on or before a particular date (the expiration date). For everyone who buys stock, there is someone who sells it. Likewise, for every option (call or put) buyer, there is an options seller.

Options Advantages

Options give the holder the opportunity of maximum gain through leverage, they can be used as risk-management and loss-prevention tools. Options can be sold to earn premiums and create cash flow.

Options Disadvantages

The buyer can lose his entire investment and the limited life of an option is a double-edged sword, a disadvantage if you are a buyer, but a distinct advantage if you are a seller. 

Options Particulars

The buyer of an option is referred to as the option holder. The seller of an option is referred to as the option's writer.

Options Trade in Contract and not shares. All option contracts are bought and sold in 100 -share lots only. One call or one put is a contract to buy (a call) or sell (a put) one hundred shares of an underlying stock. One call is the right to buy 100 shares; two calls, 200 shares; three calls, 300 shares.

A recent innovation in markets are Mini options. Mini options are option contracts where the underlying security is 10 shares of a stock. This is the main difference between mini options and standard options, which have 100 shares as the underlying security. 

The premium is the price that the buyer of an option pays and the seller of an option receives for the rights conveyed by the option. It is the price set by the buyer and seller, or their brokers, in a transaction in an options market where the option is traded. The premium does not constitute a down payment or a credit towards the purchase of a stock; it is simply a nonrefundable payment in full from the option buyer to the option seller for the rights conveyed by the option. 

The premium is always quoted on a per-share basis. If the $120 strike price calls are trading at $5, this means $5 per share. Since one call covers on hundred shares, one call option would therefore cost $5 X 100 or $500.

Equity options expire the Saturday following the 3rd Friday of the month. The closing price of the stock on the 3rd Friday of the month at 4:00 Eastern Standard Time is used to determine whether an option has value or not at expiration. Therefore, equity options expire at 4:00 PM, Eastern Standard Time, on the 3rd Friday of the month. In addition, weekly options are now available on over 400+ underlying's and offer expirations every Friday. Weekly's should be regarded as options with shorter lifespans but similar attributes.

Congratulations, you have just entered your journey towards learnings the options markets with us! You are about to understand how options work is paramount to becoming a more effective trade. Our weekly articles will be continued and constantly help you into a fuller understanding the essential options guide, the more familiar you are with this section, the more quickly you will master the options course.