Options Trading 101: The Ultimate Beginners Guide To Options By Gavin McMaster

Options Trading 101: The Ultimate Beginners Guide To Options By Gavin McMaster

What Are Options?
INTRODUCTION
Financial derivatives have been around for at least 200 hundred years since the Japanese introduced the 
first secondary market for derivatives related to commodities. Nevertheless, they made their debut in 
the U.S. after the Chicago Board of Trade was founded, in 1848, to organize commodities trading 
activities. These markets introduced futures and opened the doors for many new financial instruments
including options. In this chapter, we will explain the basics of how options work and how they are usually 
employed in today’s modern financial markets.
An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to 
buy or sell a security at a predetermined price on or before a predetermined date. To acquire this right, 
the taker pays a premium to the writer (seller) of the contract.
CALL OPTIONS
A call option is a financial contract that gives the holder the right, but not the obligation, to purchase a 
certain underlying asset at a certain price, known as the strike price. 
For example, ABC Corporation is trading at $120. A one-month call option is trading for $3.50.
The buyer of this call option has the right, but not the obligation to buy 100 shares of ABC for $120 per 
share at any time during the life of the contract. For this right, the buyer of the contract pays $3.50 to 
the seller.
The seller of the contract receives and keeps the $3.50 but is obligated to deliver 100 shares at $120 if 
called upon to do so.
PUT OPTIONS
In turn, a put option is a financial contract that gives the holder the right, but not the obligation, to sell 
a certain underlying asset at the strike price on or before expiry.
Using the example of ABC Corporation trading at $120, a one-month put option is trading at $4.00.
The buyer of this put option has the right, but not the obligation to sell 100 shares of ABC for $120 per 
share at any time during the life of the contract. 
For this right, the buyer of the put contract pays $4.00 to the seller.
The seller of the contract receives and keeps the $4.00 but is obligated to buy 100 shares at $120 if called 
upon to do so.

RIGHTS AND OBLIGATIONS
The fact that the individual or institution who holds the option has the right and not the obligation to 
exercise the derivative means that if the result of the operation turns out to be unprofitable, the holder 
can abstain from completing the transaction and his sole loss would be the premium paid to purchase 
the option. 
On the other hand, if the holder does exercise the option, the seller of the option must fulfill the contract.

Options Trading 101: The Ultimate Beginners Guide To Options By Gavin McMaster