Recommended
Getting Started in Options
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Thursday November 20, 2008 |
The
Underlying Security
Options
are sometimes referred to as derivatives because they derive their
value from the price characteristics of other financial assets. In the case of stock options price movements for the
underlying security, the common stock are most important.
In
our example the underlying security is IBM and the unit of trade
is the standard 100 shares. One option contract controls 100
shares. Obviously, a
large increase in the price of IBM common stock would have a
dramatic impact on the IBM November 100 calls. For example, if IBM rallied $10 to $110 the right to buy
IBM common stock at $100 would be worth at least $10, thus the IBM
November 100 calls would rally to a minimum price of $10. In this case an eleven percent increase in the price of the
common stock would lead to an increase of at least four hundred
percent for the option. As
you might expect it is this type of leverage that makes options
very attractive for speculators.
Of
course leverage can be a double-edged sword and we should not
forget that even small movements in the opposite direction for the
underlying stock price can lead to substantial losses.
american
style options 
strike
price
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