Strategy Talk Post - 2/23/2024

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Hi readers! This is the Strategy post, where I will be explaining options trading to those who are uneducated on trading options. In this week's post, I will be going over some important options trading terms. Here they are:


1) Call Option : We already went over this in the previous post, so I will briefly re-explain the term. Call options give the holder to buy the underlying stock at a certain predetermined price. Remember, call options are profitable only if the underlying stock moves above the pre-determined price at expiration.

2) Put Options: They are similar to call options, except holders have the right to sell the underlying stock at the pre-determined price. Put options are only profitable when the underlying stock moves below the pre-determined stock at expiration.

3) Long vs. Short: Long simply means you own something, and short means you are selling something. Thus, a long position means you own options and a short position means you owe options.

4) Underlying Stock: Simply the stock you purchase the options on. For example, if you purchase a Nike call options, the underlying stock is Nike. Simple as that!

5) Expiration (Date): This is the day the option is rendered useless, or expires. All options have an expiration date where they become worthless. Options can have many different expiration dates, and each set of expiration dates is called an expiration cycle.

6) Strike Price: The pre-determined price of the option. For example, if you long a $500 Nike option, you have the right to purchase shares of Nike at $500, since that is the pre-determined price.

7) Premium: Since options have high leverage and lower risk than just buying and selling stocks, you have to pay a premium for options. This is only when you are long options, as then you are buying options. When you are short options, you gain the premium as someone else is buying the same options from you.

8) Theta Decay: The value of long options decays at an exponential rate, like an ice cube melting. The long options decay more rapidly as it approaches the expiration date. Inversely, short options gain time value at an exponential rate.

9) Option Chain: This is the place where all the options are displayed to purchase and sell, in all of the different expiration cycles. 


This is it for this week's strategy post, I hoe you learnt more about options trading lingo! I will see you in the next post!

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