Simple Examples to Get Stock Options Explained

Simple Examples to Get Stock Options Explained

Generally, explaining stock options can be very difficult, especially if you are new to the business. Stock options are an economical method to gain control of a large number of shares in the market. That is why it is becoming popular every day with new investors in the market. The acquisition of stock options takes time, as well as a clear concept of the main elements. Getting the complete idea with only technical definitions is quite tricky. However, the real concept is very simple if it is explained with simple examples.

Stock options are merely based on contracts that give you the right to buy or sell certain shares at a fixed price, called the strike price on a certain date in the future. The options are divided into two types according to the right of purchase or sale that they offer. They call options that entitle you to buy shares at the exercise price and offer options that allow you to sell shares. Here these two types are explained by two simple examples.

First, to get an explanation

Imagine that there is an XYZ company, selling shares of $ 20 each. You buy options for XYZ at a strike price of $ 25 with a 3-month expiration date. The options itself cost $2. Since the options are usually sold in large part of 100 shares, you would spend a total of 2×100 = $200. However, at the same time, you get control of the shares with a current market price of 25×100 = $ 2,500. You can benefit from stocks that cost more than $ 2,500, only at the beginning of $ 200; it is an attractive part of the options trade.


The next part is how to benefit from the stock options

For example, within three months of the validity period, the share price will exceed $30 each. In this case, you will see that this is an opportunity to make a profit. You buy shares at a price of $25, and then sell them for $30 each, taking $500 for the difference in price. The net benefit will be determined by subtracting the price of option 500 – 200 = $300. Also, if the stock price does not exceed the strike price, you can skip your purchase and go with a loss of $ 200 of the cost of the stock option. Therefore, the main advantage of this type of opportunity is that it can have a very high ROI with a limited number of risks.

Now, for a put option, suppose that XYZ belongs to you, whose stock price is $20. This time you think that the prices will fall. You buy options near one of the parties at an exercise price of $18 per share. Then, if the price drops, you can sell the shares at this price and avoid losses.


Hence, you can see how stock options provide a high return on investment with low risk factors. If the above examples fail to clarify your doubts, we recommend that you consult with licensed firms or go to this site to get more information and data so that it is clear.