Do not let the “language” of options frustrate you.  There are some concepts that I suggest you understand, before trading options but, they are not that difficult.  Please take your time and if I do not explain them to your understanding, let me know and I will try a different route.

Each option has an underlying asset, a strike price, an expiration date and a premium.

Remember, options give the owner the right to buy something (the asset) at a certain price at a time in the future.  The certain price is called the Strike Price.  The time in the future is the Expiration Date.  The cost of the option is the premium.  Standard common stock options, that trade publicly expire on the saturday after the third friday of the designated month.

Lets use Microsoft on January 30, 2009 as an example.


Microsoft February 2009 Options

Microsoft February 2009 Options

On Friday January 30th, Common Shares of Microsoft Corporation last traded for $17.10.  These are the near the money options for February.  Since these are all February options they will have an expiration date of February 21, 2009.  If you look at the $18 Strike Price you will see that the Bid/Ask for the Call (MQFBR) was $0.32/$0.33 and the Bid/Ask for the Put (MQFNR) was $1.30/$1.32.  This means that the primium for the Feb 2009 Microsoft CALL (MQFBR), if you wanted to puchase it, would be $0.33/share.  And if you wanted to sell this option it would be $0.32/share.  Standard Options represent 100 shares of common stock.  This means that 1 option is the option to buy 100 shares of the underlying asset.  Therefore to buy this option it would cost $33+trading costs ($0.33X100).

On February 21:

If MSFT is trading for less than $18

      The Call will be worth $0, because you can buy the stock at the market for less than $18.

     The Put will be worth $18 – current price, because you can buy the stock for less than $18 and sell it for $18.

If MSFT is trdaing for $18 exactly:

     Both the Call and Put are worth $0.

If MSFT is trading for more than $18:

     The Call is worth the current price – $18, you can buy the stock for $18 and sell it at the current price.

     The Put is worth $0, because you would seel the stock at the current price which is abvoe $18.