Wednesday, March 11, 2009 5:27:58 AM
You also get to choose the month (from the same table) at which you expect the price will reach your target.
Like with the share price, there is a bid and ask.
At the end of the period selected if your 'strike price' selected has been passed you can elect to 'call' (buy) the share at the strike price, or take the money that equates with
the difference between the strike price and the current share
price.
For example, if you had selected a MAY '10' call for BAC. You would be betting on the share price exceeding $10 by the time the option expires (usually 3rd Friday in the month). In this case 3rd Friday in May. If the share price has reached, say, $12
you have made $2 per share profit for an option you may have paid as little as 50c for (sometimes les than that)
Options appear complicated at first, but simple once it sinks in and you are used to the terminology. It permits you to get into a stock for much less than the actual stock price.
You can both buy and sell your option before the expiry date as sometimes you are in profit before that time of expiry.
I 'write' 'call' options on the shares I own. These are known as 'covered options'. Which means I have the shares to cover
if 'called'. But that is another story.
Incidentally, options are sold in blocks of 100. So, if you have 5 options it means you have 5 blocks of 100 shares = 500.
If your option expires worthless ( not passed your strike price), all you lose is the cost of your option which is a small proportion of the cost of the actual share.
Hope that helps. There is a lot of further information on the internet.
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