how to understand options in stock market-call and put?Can anybody explain me in detail how to evaluate it?

Answer 1

the valuation and/or pricing of listed equity and index options, both puts and calls, is part science and part art.

the factors that go into figuring out the value include time (expiration date), exercise price (strike price) and volatility- and to a lesser degree whether the options are american exercise or european exercise (american exercise refers to the options being exercisable at any time before or at the time of expiration; european exercise refers to the options only being exercisable at expiration. most if not all listed options these days are american exercise).

the science of the valuating is in the time and strike price which are easily quantifiable. the art in pricing is the volatility.
in layman's terms volatility is the is the frequency and range of price movement in a given security. it is also a reflection of the probability of a given option expiring 'in the money'. options of different strike prices of the same underlying security can and often do trade at different volatilities. as well built into volatility is the intangible concept of human emotion-that being the emotional state of interested traders and investors (emotional state encompasses things such as pure speculation, or is a trader short and on the verge of believing they will get caught in a short squeeze; are they anticipating good/bad news such as earnings, book to bill, etc.) volatility

generally the deeper in the money an option is the lower the volatility; at the money and near out of the money options tend to trade at a higher volatility. also the longer the term to expiration the more value an option will have; this is referred to as time value or time premium.

econometrically speaking, the most popular method for quantifying value in the options trading world is a pricing model/formula known as the Black-Scholes model. more may be found through google and /or wiki regarding the Black-Scholes model. some in the industry use their own variation of the model and a few have also developed their own proprietary pricing models.

please feel free to ask for further clarification

Answer 2

It would not be possible to give a complete answer in the space Yahoo allows for an answer.

Instead, I will give you information about where to find the information.

You can start with free tutorials and classes at

http://www.cboe.com/LearnCenter/default.aspx

This will give you a good introduction, but to really get the complete story you should read at least one good bood on options. Two books I recommend you consider are "Options as a Strategic Investment" by Lawrence McMillon and "Options Volatility & Pricing" by Sheldon Natenberg.

Answer 3

You have several questions. If you buy GLD 130, and the price is 135, you are in the money. The stock option will go up about $1.00 for every dollar increase. eg. If you bought the 130 option for $6.40 and the stock went to 140 your option would go to approx 11.40. (not bad eh!). Most investors in this case would buy the 135 option, not the 130 option. (still in the money) When you buy options, buy close to or in the money. buy at least 30 days out, April will be fine. GLD is a prime target at these price trading options. Once you own the option, you can exercise it at anytime.