How do stock options work?

Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading. Stock prices move in 3 directions--not only do stock prices move up and down, but they also can stay the same. The first thing that I learned the hard way by trying my hand at actual options trading is that liquidity matters. Types of Options Options Basics: Companies are offering this benefit not just to top-paid executives but also to rank-and-file employees. When in doubt as to whether to buy a call with a low strike price or buy a call with a higher strike price, it is always good to look at the volume that is happening in the real market and go where the volume is I call this following the "smart money".

Suppose you were to buy a Call option at a strike price of $25, and the market price of the stock advances continuously, moving to $35 at the end of the option contract period.

Selling Calls and Puts

How Employee Compensation Works. How do stock options work? Stock options allow employees to reap the benefits of their company's growth. See more investing pictures. They want to attract and keep good workers. They want their employees to feel like owners or partners in the business. They want to hire skilled workers by offering compensation that goes beyond a salary. This is especially true in start-up companies that want to hold on to as much cash as possible.

Related Content " ". Save for Retirement First. Is child support tax deductible? A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price.

If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer. Options trading can be complicated. That education can come in many forms, including:. How to open a brokerage account. Reliable customer service should be a high priority, particularly for newer options traders.

Consider what kind of contact you prefer. Does the broker have a dedicated trading desk on call? What hours is it staffed? What about representatives who can answer questions about your account? Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory. Options trading platforms come in all shapes and sizes.

They can be web- or software-based, desktop or online only, have separate platforms for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above. Check to see if the fancy stuff costs extra. For example, most brokers provide free delayed quotes, lagging 20 minutes behind market data, but charge a fee for a real-time feed. Similarly, some pro-level tools may be available only to customers who meet monthly or quarterly trading activity or account balance minimums.

But because commissions provide a convenient side-by-side comparison, they often are the first things people look at when picking an options broker. Of course, the less you pay in fees the more profit you keep. Platform fees, data fees, inactivity fees and fill-in-the-blank fees can easily cancel out the savings you might get from going with a broker that charges a few bucks less for commissions. Discount brokers can charge rock-bottom prices because they provide only bare-bones platforms or tack on extra fees for data and tools.

Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Introduction to Options Trading. How to Trade Options. NerdWallet adheres to strict standards of editorial integrity to help you make decisions with confidence. Some of the products we feature are from partners. We adhere to strict standards of editorial integrity.

Some of the products we feature are from our partners. Previous Introduction to Options Trading. Next 5 Tips for Choosing an Options Broker. Previous How to Trade Options.

Buying and Selling Calls and Puts: Four Cardinal Coordinates

If you buy an options contract, it grants you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. A call option gives the holder the right to buy stock and a put option gives the holder the right to sell stock. Stock options give you the right, but not the obligation, to buy or sell shares at a set dollar amount — the "strike price" — before a specific expiration date. When a "call" option hits its strike price, the stock can be called away. If the option buyer believes a stock will decline in value, they buy a put option as this gives them the right to sell the stock at the strike price before expiration. If the underlying stock loses value prior to expiration, the option holder makes money.