Option trading can be better understood through an example. Let’s say a company has a price of $67 and a premium of $3.15 for a call in two months of $70. The price of a contract would be $315 which would give you the right to buy 100 shares at $70. In the next two months you could sell your right to buy the shares (selling the option) or exercise the option. If the price of the stock falls below the option strike price at the expiration, then you have lost all your money.
- In options, if the premium cost of a call is Y, the total price of the contract is 100Y taking into account a 100 shares.
- In options, the strike price of a stock is the price the stock must rise against in other for the contract to be worth anything useful.
- In options trade terminology, “closing your options” means selling the options because they have made a profit.
“By the expiration date, the price tanks and is now $62. Because this is less than our $70 strike price and there is no time left, the option contract is worthless. We are now down to the original investment of $315.”