For typical investors, options markets can be risky

Stock options are not securities I recommend; However, it’s not unusual for someone to ask me about them.

There are two kinds of stock options – calls and puts. The buyer of a call option on a stock has the right to buy 100 shares of the stock from the seller for a fixed price, called the exercise price, until a fixed date, called the expiration date. The buyer pays the seller an amount called the premium. The buyer of a put option has the right to sell 100 shares of the stock to the seller at a fixed price until the expiration date for the exercise price.

The premium on an option depends on two factors: the option’s “intrinsic value” and the time until expiration.

The intrinsic value of a put option depends on the amount that the exercise price exceeds the stock’s current price. If the exercise price of a put option is $52 a share and the stock is trading at $50, then the option has an intrinsic value of $2 a share or $200. Even if the stock is at $52 a share, this put option will have value based on the time until expiration.

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