Read our blog post on how stock options work.
Since we’ve already covered how stock options work, it’s definitely beneficial to know the characteristics of stock options before trading.
- One stock option controls 100 underlying shares.
- The bid price is the price the buyer is willing to pay for a security
- The ask price is the price the seller is willing to accept for a security.
- The market price is the price at which the buyer and seller agree upon. It’s usually between the bid and ask price.
- The strike price is the price at which a specific contract can be exercised.
Market price – Strike price = profit/share on the exercise
- The exercise or expiration date is the final date in which the option is valid. If left to expire, the option becomes worthless.
- American options can be exercised at any time up to expiration.
- However, European options can only be exercised at expiration.
- Intrinsic value is a fundamental value of option based on the value of the underlying stock without reference to its market value.
- Extrinsic value is the difference between the option’s market price and its intrinsic value (inherent worth)… usually time and volatility.
Hugh Grossman, Head Trader at Day Trade SPY.
Hugh Grossman is the founder and Head Trader at DayTradeSPY and uses his vast experience to teach his methods to make consistent daily gains trading SPY options. Join Hugh in his interactive Trading Room to see how he regularly pulls in the profits!
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