Options Education

 Option Anatomy 

Options educational content provided courtesy of ChartBender.

Option Anatomy provides a clear, concise explanation of what an equity option contract is and the components of which it is comprised. We talk about the rights granted to the option buyer and the obligations of the option seller. We also cover the typical jargon such as "in-the-money", "at-the-money" and "out-of-the-money".

The graphing convention for the call option (top) and the put option (bottom) is valuable in Option Anatomy, as it enables us to visualize all the parts of the option contract, as well as their relation to one another.

In Option Behavior, this type of graph is priceless because it shows you how every component of the option behaves in response to the key variables¹ that influence the option's price. The key variables¹ are:

1. Implied Volatility (IV), which reflects the market's expectation of the stock's² future volatility
2. Movement in the underlying stock² price
3. Decay, which is the reduction in the option's premium as time passes

¹Dividends and the risk-free interest rate also play a role in option pricing. However, with regard to the daily behavior of option prices, the three key variables listed above are those that matter.

²Throughout the OKX, the word "stock" can be replaced with any underlying asset on which options are traded.

If you BOUGHT the XYZ Jan 35 Call pictured above...

You would PAY $3.50 x 100, or $350 for 1 contract. Although the option price is quoted as $3.50, the value of the contract is 100 times that because option contracts generally represent 100 shares of the underlying stock.

You would have the RIGHT to EXERCISE the option, which would allow you to BUY 100 shares of XYZ stock for the strike price of $35.

You would have this right until the option expired in January. Expiration for equity options is the the 3rd Saturday of each month. The last day to trade them is therefore the Friday before the 3rd Saturday.

If you SOLD SHORT the XYZ Jan 35 CALL pictured above...

You would RECEIVE A CREDIT in your account of $350 for 1 contract.

You would have the OBLIGATION to SELL 100 shares of XYZ stock for the strike price of $35 in the event that you were ASSIGNED. Assignment occurs when the buyer of an option exercises it. When this happens, traders who have sold the CALL option short are randomly selected to SELL the stock to the person exercising the option.

Your obligation would last until the option expired or until you closed your short position by purchasing (buying to close) the option.

This educational content is provided by ChartBender.
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