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Chapter 1 - Introduction

The document introduces the topic of option pricing and how it differs from stock pricing. It discusses that while stock prices show the last traded price, option prices require further explanation. The next few lessons will examine option prices in more detail and show how to read a complete option price chart.

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jamieuis68
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20 views

Chapter 1 - Introduction

The document introduces the topic of option pricing and how it differs from stock pricing. It discusses that while stock prices show the last traded price, option prices require further explanation. The next few lessons will examine option prices in more detail and show how to read a complete option price chart.

Uploaded by

jamieuis68
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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3/23/22, 9:49 PM Chapter 1: Introduction

Chapter 1: Introduction

Believe it or not, you know a lot about options! You know what they are and, basically, how they
work. Puts and calls are no longer such a mystery. You've got a good idea of the strike price and
what the option expiration process is all about. Option symbology is easier to learn than it used
to be, and we trust you have a firm grasp of it now. You have many of the puzzle pieces you need,
just be aware that things change so you might see abbreviations used, depending on the site or
brokerage firm you use to trade. We’re building your knowledge and understanding piece by
piece in sequential order. Eventually this process will allow you to truly appreciate the power and
flexibility of stock options—which we've been crowing about. You'll finish this course knowing
exactly what you're doing before your first option trade instead of, as is many people’s
experience, after.

Remember how you finished Chapter 3 in our last lesson by looking at a sample listing of IBM
options? We said then that you were seeing only part of how a real option listing looks. The
missing element to that chart was, of course, complete option prices—or what investors often
call option premiums. Maybe you've already looked at option prices while you visited the Lesson
2 Resources for Further Learning and worked on your assignment. Did the prices make sense to
you? Well, it's time to fill in any blanks. In this, and the next couple of lessons, we'll examine the
critical topic of option prices.

First, let’s talk about how option prices and stock prices differ. Since you're taking Introduction to
Stock Options, you're probably interested in stock investment already. Maybe you even check the
internet every day to look up the current price of your favorite stocks. It's part of the fun of
investing, don't you think? If you're one of the many who look up stock prices, you know the
internet stock listing shows the price your stock last traded at, or closed at, for the previous
trading day. It may also give you other information, like the highest and lowest prices for which
the stock sold or the total number of shares traded that day.

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3/23/22, 9:49 PM Chapter 1: Introduction

If you turn on any financial news channel during the day, you'll see a ticker tape running across
the screen showing the stock price changes during trading. Successful investors, of course, buy
when the stock price is low and sell when the stock price is high. This should be part of your
plan. What causes a lot of heartache with novice investors is trying to time a buy at the bottom
and sell at the top. No one knows when that is…at least we don’t! We end up getting greedy, and
hold some things too long, or fearful and sell some things too early! But that’s a whole
discussion we can have on behavioral finance. Let’s get back to options!

The good news is that trading stock options is very much like trading stocks. Even better, as an
option investor, you can make a profit if a stock price goes up, goes down, or even stays the same.
But the first step to becoming a successful option trader is to understand option pricing. This is
what we'll show you in the next few lessons. In this lesson, you'll learn to read a complete option
price chart and see how it's similar to, but not exactly like, a stock price chart.

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