Lesson 2 - Basic Terms and Concepts

3/23/22, 9:43 PM Lesson 2: Basic Terms and Concepts

Introduction to Stock Options / Lesson 2: Basic Terms and Concepts / Lesson 2: Basic Terms and Concepts

Lesson 2: Basic Terms and Concepts

By now, you're probably beginning to see why so many people consider options exciting. You learned in Lesson 1 that options are
incredibly versatile; if you use them correctly, they can improve the performance of almost any investment portfolio. Now you know that
options can profit when stocks go up and when they go down. Also, you need less money to take advantage of the movement of a stock's
price using options versus buying the underlying stock.
With more money to invest, you can further diversify your investments and reduce risk. And don't forget the leverage options offer.
[#presto_changeo question#]
What do we mean by diversify and leverage?
Term Definition
Diversify Basically, don’t invest everything in one stock, spread out your investments.
Leverage In simple terms, it is the ability of a small investment to make a large profit.
Terms
Such leverage, in percentage terms, can reward the investor five or 10 times more than buying a stock. The Lesson 1 examples suggest
these advantages and are important to review, since these are the reasons we invest with options in the first place.
The Chicago Board Options Exchange (CBOE) reports that an average of over 5 million contracts trade every trading day. This figure is up
nearly 450% compared to a decade earlier. CBOE estimates over 40% of that volume is from individual investors. The point is, you're not
alone in your interest in options, and there are good reasons for that interest. So, it's okay to get excited about options. Let's continue to
find out why.
Now that you know exactly what an option is, it's time to get into specifics. In Lesson 2, we’ll look at some important terms, their
definitions, and their underlying concepts. When you understand these terms, you'll have the tools to really discuss stock options. We are
going to build our understanding by breaking down the basics before getting into any trades or strategy. While you have questions about
those areas, hold tight for a bit and we may answer your questions.
Each option has a specific symbol. If you know this, you'll know precisely what option you’re buying or selling. None of this is difficult, but it
takes some time to get comfortable with the terms. Take your time, be patient, and remain focused. It'll be worth the effort!
Think About It…
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Options aren’t some sort of get-rich-quick scheme, nor

do they guarantee riches at all. Could you make a lot of
money using options? Could you make this big money
in, say, a week? Could you ever make a living investing
with options? Well, yes, you could. But if it were easy,
everyone would be doing it—and, as you know, the
world doesn’t work like that.
Think of options realistically: as a fantastic, versatile investment tool. Let’s use the analogy of woodworking tools. Just because someone
has a complete set of top-of-the-line woodworking tools doesn’t make that person a master cabinetmaker. Likewise, just because you’ll
know a good deal about options by the end of this course doesn’t mean you will necessarily be a successful investor.
You have to admit, though, that having great tools does give an advantage, right? Options, therefore, aren’t the answer to the investment
puzzle, but they are a valuable piece to that puzzle if you can use them in your portfolio. You can find the other pieces elsewhere—and
we’ll have some suggestions along this line later in the course. So, resolve to learn about this magnificent tool, but use it with caution, with
wisdom, and in concert with other important investment lessons.
Okay, back to basics. In Lesson 1, we spent a long time defining what an option is… but we only hinted that there are two kinds of options.
In this lesson, we will describe both of them.
The first type of option is a call, and the other is a put. By now, the call definition is probably familiar to you but, the put option is slightly
different. Look at the flashcards below and see if you notice the difference.
[#flashcards#]
!Click on each card to read the definition.
Call Option
The call option gives the buyer the right, but not the obligation, to buy the underlying security at a specific price for a specified time.
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Put Option
The put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time.
As you can see, the difference is as simple as the call option giving the buyer the right to buy while the put option is giving the buyer the
right to sell an underlying security at a specific price for a specified time. We want to concentrate on call options for now; later, you can
apply almost all you learn about calls to puts.
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3/23/22, 9:43 PM Lesson 2: Basic Terms and Concepts

Lesson 2: Basic Terms and Concepts

What do we mean by diversify and leverage?

Think About It…

Options aren’t some sort of get-rich-quick scheme, nor

!Click on each card to read the definition.

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