I have been doing some reading on options but have to admit I just need someone to give me a very general run down in laymens terms.
Posted by ROLY on :
Buying an option is just like placing a non-refundable deposit on a house while you search your other options of homes to buy. Let's say for instance lucent is trading at $5.00 per share, but the option price is $2.00. There will be whats called a "strike price", which will be given in advance. Lets say in this case the strike price is $10.00.You can either place a "call" or a "put" purchase. If you call your saying that the price of the stock ( a pre-determined date will be given ) will be higher than the strike price. If you put your gambling that the price of the stock will drop. If the stock surpasses the strike price, let's say its now at $15.00, you get the difference from the option price. Meaning you paid $2.00 for the option, the stock is at $15.00 you make $13.00 per share. On the other hand if the stock declines to .50 cents you must pay the $1.50 difference per share. It's the exact opposite for a put call. In general Your leasing the stock. If your "call" surpasses the strick price you win, if it goes under you lose. If your "put" goes over the strike price you loose. If it stays under you win the difference. It's a risky purchase. you could loose a lot of money, but on the other hand you could win a lot too..