Listed
below (in 1-5), are a few of the most important terminology
necessary, to trade or invest in "Options."
The following four terms will be covered:
1. LEAPS
2. In The Money
3. At The Money
4. Out of The Money
5. Intrinsic Value
1. LEAPS: Long-Term Equity Anticipation Security.
LEAPS are traded similar to Stock Options when you consider,
where they trade, when they trade, how they are quoted,
when exercised, and several other factors. However, the
major advantage with LEAPS is "time" allotted
for each trade. The primary disadvantage is that LEAPS
are more expensive than regular Options.
LEAPS are not available for all stocks. Just as all stocks
are not Optionable, all Options are not LEAPable. LEAPS have
a limited number of strikes and expiration months. For ordinary
Options there are many more choices in months. There are
four different months from which to choose. For strikes,
every month starts with one ITM, one ATM and one OTM. As
the stock price fluctuates, whenever it reaches the highest
or lowest existing strike, a new one will be created.
LEAPS on the other hand, have only the month of January
on one of two different years. Although they too have the
ITM, ATM and OTM, the ITM and OTM are about 20 to 25 percent
above or below the market price. Also, there may be more
delays in creating new strikes as the stock moves and there
will be no new months added every month. In short, LEAPS
have fewer options.
I suggest that you go to the CBOE or your online brokerage
account and check out the options list on the regular options
and the LEAPS options for comparison, and to gain more clarity
on the basics of leaps.
2. At-The-Money: when the option is at the money (smile).
Example. IBM is $100. A December 100 call or put would be
considered at the money because the strike price is the same
as the stock price.
3. In-The-Money: when the option has intrinsic value. A
call option is in the money if the underlying security is
higher than the striking price of the call. A put option
is in the money if the security is below the strike price.
Example. IBM is $100. A December 90 call is in the money,
a December 110 put is in the money.
4. Out-Of-The-Money: when the option has no intrinsic value.
A call option is out of the money if the stock is below the
striking price of the call. A put option is out of the money
if the stock is higher than the strike price of the put.
Example. IBM is $100. A December 105 call is out of the money.
A December 95 put is out of the money.
5. Intrinsic Value: is the amount by which the stock price
exceeds the strike price. This determines the value of an
option on expiration day.
These are just a few basic terms that the successful options
trader/investor needs to know. The definitions here are short
and simple and this article's purpose is to motivate you
to study them more detail.
The reasons many people lose money when using options, are
because they do not take the time to study stock options,
and, learn and understand the terminology. Options are not
traded like stocks.
There is risk associated with investing in Stock Options.
A through understanding of the investment tools, before investing,
limits risk considerably.
In part six of this series, I will spend more time on terminology,
since it is an important aspect if you are going to use
options as an investment tool.
Previous Options Articles:
Options Start
Options Article 1
Options Article 2
Options Article 3
Options Article 4
Options Article 5
Options Article 6
Jenyce Johnson
Options Strategist, Trader and Coach
Not a licensed professional
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