Key Concepts

A Brief Overview of Options

Investors who purchase call options are bullish that the asset's price will increase and close above the strike price by the option's expiration date. Options are available to trade for many financial products such as bonds and commodities but, equities are one of the most popular for investors.

Options give the buyer the opportunity—but not the obligation—of buying or selling the underlying security at the contract-stated strike price, by the specified expiration date. The strike price is the transaction value or execution price for the shares of the underlying security.

Options come with an upfront fee cost, called the premium, that investors pay to buy the contract. Multiple factors determine the premium's value. These factors include the current market price of the underlying security, time until the expiration date, and the value of the strike price in relationship to the security's market price.

Typically, the premium shows the value market participants place on any given option. An option that has value will likely have a higher premium associated with it versus one that has little chance of making money for an investor.

The two components of options premium are intrinsic and extrinsic value. In-the-money options have both intrinsic and extrinsic value, while out of the money options' premium contain only extrinsic (time) value.

Options trading can be extremely volatile, especially in times of significant market changes such as with large-scale macroeconomic events like natural disasters, economic plunges, and other such events.