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Amount of       Equivalent Amount of
Shares            Option Contracts
100                      1 200                      2 1000                     10 7500                     75 15000                    150 50000                    500 100000                   1000 

Total Dollar Cost of Trade = Number of Contracts x Price per Contract x 100

Option contracts are literally a sales agreement between two parties.

An option is a traded security that is a derivative product.

By derivative product we mean that it is a product whose value is based upon or derived from the price of something else. Since we are talking anyhow stocks, a stock option is based upon, between other things, the price of the underlying stock.

There are also options on other traded securities such as currencies, indexes and interest rates, but here we will limit our discussion to stock options, or options based on stocks.

A distinguishing factor of an option is that is a depreciating honour in the sense that it has a limited life, and has to be used previous the date on which it expires. As time goes by, the option loses value as it moves closer to its expiration date

When we speak of options in terms of volume, we refer to contracts. Each stock option contract is equivalent to 100 shares of stock. When we talk fast by two contracts, we are talking all round 200 shares, 10 contracts; we are talking back 1,000 shares, 75 contracts 7500 shares and so on.

NOTE: It is important to understand the dollar cost of options till in effect trading them. When an option is quoted at $1.00 per contract, the investor must realize that the $1.00 represents a price of $1.00 per share, not per contract. Remember that each contract is worth 100 shares. This means that if you were to buy one option contract at a quoted price of $1.00, your total cost will be $100.00 (1 contract x $1.00 per share x 100 shares per contract). If you were to buy 10 contracts for $1.50 per contract, your total cost will be $1500.00. Use the formula underfoot when enumerative total dollar cost of the option.

Amount of       Equivalent burden of
Shares            Option Contracts
100                      1
200                      2
1000                     10
7500                     75
15000                    150
50000                    500
100000                   1000 

Total Dollar Cost of Trade = Number of Contracts x Price per Contract x 100

Option contracts are literally a sales conjugation betwixt and between two parties. The two parties are the user (or holder) and the seller (or writer). When you buy an option contract you are considered to be long the option. When you sell an option contract, you are considered to be short the option. This, of course, is self-appointed you had no previous position in the said option.

In an option contract, howbeit it seems as though the agent and seller must be tied together, they are not. You see, the customer doesn’t really buy from the seller and the seller doesn’t really sell to the buyer.

In reality, an organization named the OCC or options elimination Corporation steps in mid the two sides. The OCC buys from the seller and sells to the buyer. This makes the OCC neutral, and it allows both the customer and the seller to trade out of a position without involving the other party.

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