There are essentially 5 parts to an options contract. The underlying stock, expiration date, strike price, option type and strategy, and the debit paid or credit received. In this video, we'll walk through a simple option order that shows each of these different areas so you can become more familiar with them as we move forward.
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Hey, everyone. This is Kirk here again at Option Alpha. In this video, we're going to go through option contracts specifics. There are essentially five parts to an options contract. These are the "choices" that we've talked about previously in other videos.
I think it's really important that we go through this again as we kind of wrap up part one in track one here, and start laying the foundation again for what we're going to start getting into a little bit more as we go deeper and deeper into this beginner track.
Here's an example of a basic options contract. Again, we'll go through in this video kind of the differences between all of these five parts or things that can move. This is probably going to be one of the last times that you'll see actually in this track us use like a graphic example.
That's because we'll start to really get into platform specifics, and looking at real-time trades and real-time examples here in this track, which will help you get more familiar with what you're eventually going to be doing, because you're not always going to be looking at graphics like this.
Here's the thing. There are five parts to this contract. The first part or the one that we're parting to here is the actual stock. This is the actual security that we're going to end up trading, in this case, XYZ. This could be anything.
It could be Apple, AAPL, CMG, which is Chipotle, SPY, which is the S&P 500 ETF. This part of the option order is the actual contract that everything hinges off of. Remember, an options contract is just an agreement to buy yourself stock. This tells us what we're going to be buying or selling.
Part number two of an option contract is the expiration date. This is the date in which we say that this contract expires or no longer has any value or at least extrinsic value. In this case, it could be August.
We didn't put a date here because I don't want to pigeonhole you into any particular date. Usually, what this will say is like AUG16, which is August of 2016, or AUG17, which is August of 2016.
There's got to be some date factor that tells you when the contract expires. Different brokers are going to show it different ways, but that's usually the next part of a contract. You got to know what the stock is, and then you got to know when the expiration date is.
Part number three of the contract is your strike price. This is the price at which you agree to either buy or sell the underlying stock in the future. In this case, for this example, the strike price is 70.
Now, remember, this is not the price at which the stock is trading at right now. XYZ might be trading at let's say $50 per share right now, but our strike price in this case, if we're buying a call option or selling a call option is $70.
That becomes the future agreement, or in the case that I like to say, the price at which you strike a deal with somebody, that's the number right here, which is 70. That's the third part of the option contract order.
The fourth part is the type. This is simply comes down to are we trading calls or are we trading put options. There are only two types of options, calls or puts.
This is where you'll see if the 70 strike is either on the right-hand side of the option pricing table, which is the put options or on the left-hand side of the options pricing table, which is the call options. Again, call or put. Very simple and easy.
The last and fifth part of an option contract is the premium that is paid or received by either party. In this case, this is premium. I think I spelled that right [inaudible 00:03:51] a little antiquated here.
The premium that is received or paid to the buyer or the seller. In this case, if you're an option buyer, you would be paying #3.10 for this option contract. If you're an option seller, you'd be receiving $3.10 for this option contract.
It's important to note right off the bat, we'll try to do this a couple more times on this track that we have here at Option Alpha.
Premiums and option contracts have usually about $100 or a 100 point multiplier, meaning that whenever you see a premium of let's say 3.10, it's actually or the true value of that contract is actually multiplied by the options multiplier, meaning that the value of that contract actually is $310.
It's $3 and 10 cents. That's the way it shows in broker platforms, but the value, the actual total dollar amount is $310 for that contract. Now, this would be the same if an option contract was showing a price of 0.25 or 25 cents.
It's not that it's actually worth 25 cents. That's actually worth about $25. Quick little note there. Again, we'll go over it in more detail later on.
Hopefully, this gives you a good basis for understanding just the contract specifics. It will get easier as we go through more and more examples. Again, this video is meant to be here to lay the foundation for what is involved and builds on what we already talked about with what an options contract is, what the parts of the contract are.
Now, as we get further through the track, we'll get a little bit more specific on buying puts versus selling puts, buying calls versus selling calls, etc. to help continue to speed up your learning process here.
As always, hope you guys enjoy these videos. If you have any comments or questions, please ask them in the comment box right below. If you've enjoyed this video, please take a moment to share online. Help spread the word about what we're trying to do here at Option Alpha.