Where can I find a really simple step by step explanation of how stock options work?

Answer 1

A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the option's pay-off. Thus it is a contract to buy (call option) or sell (put option) a certain number of shares of stock, at a predetermined or calculable price.

A stock option contract's value is determined by five principal factors:-

The price of the stock,
The strike price,
The cumulative cost required to hold a position in the stock (including interest + dividends),
The time to expiration,
The estimate of the future volatility of the stock price.
For large corporations in economies such as the United States, there is a liquid market in put and call options for certain expiry dates and certain strikes close to the current stock price. Thus for those contracts valuation is given "by the market". For other contracts, with different strikes and different expiries the market price can be used to give an estimate of the future volatility, which in turn can be used in models such as the binomial options model (for American options) or the Black-Scholes model with volatility smile for European options to value the non-standard contracts.

The estimate for future volatility is perhaps the least-known input into any pricing model for options, therefore traders often look to the marketplace to see what the Implied Volatility of an option is -- meaning that given the price of an option and all the other inputs except volatility you can solve for that value.

The most common way to trade stock options is trading standardized options contracts that are listed by various futures and options exchanges -- there are currently six exchanges in the United States that list standardized options contracts based on underlying stocks -- The Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) in New York City, the Pacific Exchange (PCX) in San Francisco, and the Chicago Board Options Exchange (CBOE) which are all open-outcry marketplaces, and the International Securities Exchange (ISE) and Boston Options Exchange (BOX) are electronic marketplaces. In Europe the main exchanges where stock options are traded are Euronext.liffe and Eurex.

There are also over-the-counter options contracts that are traded not on exchanges, but between two independent parties. At least one of those parties is usually a large financial institution with a balance sheet big enough to underwrite such a contract.

Options trading, without intent to ever exercise the option, can be used as a form of leverage. The price of an option on a security will move more than the price of the security itself. For this reason and due to their usefulness in financial engineering, the total value of trading in options has at times exceeded the total value of trading in stocks themselves.

Options can also be traded to capture a certain level of volatility on an underlying security.

Stock options for the company's own stock are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations. It is also sometimes done for non-executive employees, especially in the technology sector, in order to give all employees an incentive to help the company become more profitable. For details see the employee stock option article.

Answer 2

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Answer 3

Stock options are not easy. Unless you are an experienced stock trader, I don't know of any broker that will let you deal in options. They are a wonderful tool to "insure your stock" and even to profit from if done right. An unedjucated option trader would go broke quick.

If you are still interested in learning the basics, go to www.richdad.com. He has a game called cashflow 101 and cashflow 202. You will need both to play 202, but he has a good way of explaining the basics, and even practice the basics in a game format. This will in no way prepare you for the real thing, but it will teach you a foundation to build on.

Answer 4

http://www.investorwords.com/3477/option...

http://investopedia.com

http://www.cbot.com

http://www.option-income.com/

http://www.option-income.com/useful-trad...
you may want to also go to The Options Industry Council (OIC) from the useful trading resource page

Here's a couple of good underlying facts that are difficult to uncover. Of all options, 85% expire worthless. Buying them is a fool's game. They are designed to expire worthless.

If you don't have an option analysis program, you are at a severe disadvantage.

You are looking at the incredible leverage and already counting up how much money you can make. You should be evaluating it from a standpoint of risk.

In a few years, you might be ready if you can become successful trading stocks first.

Answer 5

If you get the answer to this question will you please let me know. My son and I have been wanting to invest in the stock market now for about 6 months and do not have a clue where to start...we have purchased and read books, internet, etc and still at a loss.

Answer 6

http://www.cboe.com
Everything you ever wanted to know about stock options...
and now you're afraid to ask...