Can someone please explain what Options are?

Hi guys,

Great site here and with some great posters here (you know who you are!).

I have been trading for about 6 months now, and call my self a trader, making about a dozen or so trades a month depending upon market conditions, etc.

After trading mainly the normal shares (I think the term is heads(?)), I was wondering whether someone can explain what the idea behind options is?

All that I know right now is that Options are much cheaper than the normal shares, but I was wondering what exactly makes them so cheap and are there any conditions or pre-requisites that apply to them (ie- do I have to buy normal shares if I buy options?)

If someone can provide me with a bit of detail or can shove me into the right direction in regards to options then that would be very good.

Thanks all

Happy Trading!

Very good freebie software (options toolbox) available here...
http://www.cboe.com/LearnCenter/RCTools.aspx

It explains all the factors (the "greeks") that affect an options price etc.

Mike

ans25 said:

After trading mainly the normal shares (I think the term is heads(?)), I was wondering whether someone can explain what the idea behind options is?

All that I know right now is that Options are much cheaper than the normal shares, but I was wondering what exactly makes them so cheap and are there any conditions or pre-requisites that apply to them (ie- do I have to buy normal shares if I buy options?)

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boggo - i think ans25 was referring to company issued options, and not calls & puts.
assuming thats the case ans25, to put it simply, the options you see listed sitting with the heads everyday are company issued options, commonly issued free to those who bought shares in an IPO. these options are traded just like shares.
while the rules on them can vary, the most common simply allow the owner of the option to buy a share at a pre-determined price. the only catch is that there is a deadline for when this can happen. after that deadline the option is worthless. so to avoid that, you exercise (convert) the option into a share for the cost of the exercise price. hence theres a difference in their listed price. often this difference is the exercise price, but considering the sometimes long deadline, the difference can be less.
additionally if a stock has a bullish outlook, options can be trading a lot closer to their heads than they normally should be, as long term investors simply want to put their hands on more stock initially for the same outlay. they are then prepared to sit and wait for the deadline to approach before paying the exercise price.

son of baglimit said:

boggo - i think ans25 was referring to company issued options, and not calls & puts.

Click to expand...

Yes, I think you are correct after reading it again.
Hope the software is of some help anyway if he chooses to download it.

Mike