Options Unlocked: Your Key to Learning Options Fast and Trading Like a Pro by Christopher McCarthy

Options Unlocked: Your Key to Learning Options Fast and Trading Like a Pro by Christopher McCarthy

Chapter 1: Introduction
Stock options are a popular investment tool for those looking to generate
high profits in the stock market. However, they are also a complex and risky
financial instrument that requires careful consideration and analysis before
trading. In this beginner's guide, we will provide you with an overview of
how stock options work, why they are popular, and the risks involved in
trading them.
Stock options give an investor the right, but not the obligation, to buy or sell
a specific stock at a certain price, known as the strike price, within a set
period of time, known as the expiration date. Options are derivatives, which
means their value is based on the value of the underlying stock.
European Options
European options are options that can only be exercised on the expiration
date. In other words, the buyer of a European option can only exercise their
option on the day of expiration. European options are typically settled in
cash, meaning that the buyer receives the difference between the strike price
and the market price of the underlying asset at expiration. European options
are commonly used in the trading of currencies and commodities.
American Options
Unlike European options, American options can be exercised at any time
prior to the expiration date. This means that the buyer of an American option
has more flexibility and control over when to exercise their option.
American options are also typically settled in cash and are commonly used
in the trading of stocks and indices.
A stock option consists of two main components: the option premium and
the option strike price. The option premium is the price that the buyer of the
option pays to the seller in exchange for the right to buy or sell the
underlying stock at a later date. The option strike price is the price at which
the underlying stock can be bought or sold.
We can represent these two components mathematically as follows:
Option Premium = Time Value + Intrinsic Value
where:
Time Value = Option Price - Intrinsic Value
Option Price = Premium paid by the buyer to the seller
Intrinsic Value = Current Stock Price - Option Strike Price
Therefore, the equation for a stock option can be written as:
Option Premium = Option Price - (Current Stock Price - Option Strike
Price)
or:
Option Premium = Option Price - (S - X)
where:
Option Price = the price of the option agreed upon between the buyer and
the seller
S = the current stock price
X = the option strike price
There are two types of options: calls and puts. A call option gives the
investor the right to buy a stock at the strike price, while a put option gives
the investor the right to sell a stock at the strike price. Investors can use

Options Unlocked: Your Key to Learning Options Fast and Trading Like a Pro by Christopher McCarthy