'Risk comes from not knowing what you're doing.' Warren Buffett

Stockmarket News Updates

Sign up for our FREE Stockmarket News email service.

Click here

BASIC OPTIONS TERMINOLOGY

Strike price

This is the price at which the option holder is entitled to either buy or sell the underlying parcel at (and the price at which the option seller must either sell or buy the underlying parcel if the option holder exercises the option).

In the above examples, the strike price for the BHP call option is $45 and the strike price for the NAB put option is $40. The strike price is also referred to as the exercise price.

Expiry date

The pre-determined date of an option is known as the expiry date. The expiry date is always the last Thursday before the last business Friday in the month of expiry. For both the call and put option examples above, the expiry would be the Thursday, 29 May 2008.

One thing to take note of… for both types of option (calls and puts), there are also two styles of expiry; American-style and European-style. With American-style options, the holder of the option has the right to exercise either on or before expiry. With European-style options, the holder of the option may only exercise at expiry, not before. Equity options in Australia are generally American-style expiry.

Premium

This is the price at which the option trades. It is the price that the buyer pays and the price the seller accepts for the option.

Market value

As an option contract represents a number of shares (usually 1000), the total cost of buying a contract is the number of shares (1000) multiplied by the premium. So if the BHP call option in the example above is bought at 60c (the premium), the value would be 1000 x 60c, which equals $600 (for one contract). This is the amount that the buyer will pay (plus brokerage etc) or the seller will receive.

Profile: Warren Buffett

Far and away the most famous and successful stock market investor of all time.

more

Why Invest in Shares?

Beyond shares being the best long-term investment and having tax benefits, they also offer other advantages, including flexibility and liquidity.

more

Patience in InvestingCharacteristics of an Attractive InvestmentGarbage Collection or Investing?Goals
How Does the Stock Market Work?Why Invest in Shares?Choosing a StockbrokerOpening a Broking AccountBroker's CostsHow Much Do I Need to Start Investing?
Buying SharesDividendsBuying for DividendsTax Implications of Shares
Developing an Investment StrategyTakeoversTakeover StrategiesTakeover Q&A
Basic Options TerminologyContracts for Difference (CFDs)Option UsesOptions
Benefits of DIY SuperannuationWho Can Participate in DIY Superannuation?Investment Requirements
FramingLoss AversionAnchoringHindsight BiasConfirmation BiasCognitive DissonanceRepresentativenessAvailability BiasHerdingSelf Attribution Bias
Benjamin GrahamGeorge SorosWarren Buffett