Call And Put Options Basics - Factors That Drive The Price of Put and Call Options

Nov. 18, 2010 - PRLog -- Call And Put Options Basics

In the world of stock options, there are fundamentally two types: call options and put options.

Call options convey the right to purchase stock at an agreed to price referred to as the strike price, whereas put options convey the right to sell stock at an agreed to price. In both cases, the option "purchaser" has the right to purchase or sell the stock with no obligation to purchase or sell, and the option "seller" has the legal obligation to fulfill the terms of the option contract. But a key question to think about in stock options investing is "What price should you pay for an option?" or "What price should you demand whenever you sell an option?"

On the fundamental level, there are mainly six key factors that dictate the value of a stock option. Three of these factors are discussed below:

Stock Price & Trend:

The first factor affecting the price of a stock option is the present price and trend of the underlying stock for which the option is written. For example, if a stock has a gentle uptrend, you will usually find that call options are more expensive than put options for the stock just because the call is less likely to expire worthless.

If the stock is in a downtrend, you will typically discover that put options are costlier than calls, because the calls are likely to expire worthless.

Curiously, the absolute price of the stock does not affect the premium cost of calls or puts; in different words, options for a $10 stock and a $50 stock could well have very similar prices all else being equal. Nonetheless, we will return to the "price" factor in a moment. Get Internet #1 - Call And Put Options Basics @ http://tradingcure01.webs.com  and be Successful forever!

Strike Price:

The strike price of a stock option is the price per share of stock that will be paid if the option is exercised. Thus, the relationship between the strike price and the worth of the underlying stock is a major factor in the price (i.e., the premium) for the stock option. For instance, if a stock is priced at $25 per share, then a $25 Call or Put is considered "At the money". The premium for an At-The-Money options is generally a moderate price.

Nevertheless, a $20 Call for a $25 stock, already has $5 of "intrinsic value" meaning you could exercise the call today and you'd get the stock for $5 below its present market price. Such a call would have a premium of at least $5. Because of this, the $20 call can be considered "In the Money".

A $20 Put for a $25 stock, however, is "Out of the Money". In other words, the stock price has to fall by $5 or more by the expiration date to avoid expiring worthless. The put has "time value", however no "intrinsic value". The current premium for the "out of the money" put option will be significantly lower than the premium for an at-the-money option or in-the-money option.

Thus, the relationship between the present stock price and the strike price of the option is a powerful factor in the current price of the option.

Expiration Date (versus the current date):

Stock options are only good for a particular amount of time; it may be for just a few hours up to more than 2 years. The date on which the option is no longer valid is the "expiration date". Obviously, an option that expires three months from now has more time for the option to gain value than one that expires today. Thus, the more time there is between now and the expiration date, the higher the premium will be for stock options. Get Internet #1 - Call And Put Options Basics @ http://tradingcure01.webs.com  and be Successful forever!

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