What is an Option - on the stock market?

"An option is a contract that is written on a specifi c asset like a house, a car or a stock. In the English language, an ‘Option’ is defi ned as the ‘right to make a choice’. So an Options contract usually gives you the right to buy a specifi c asset at a pre-determined price.

For example, if you have an option to buy a car at a pre-determined price of $50,000, it means that you have the RIGHT to purchase the car at $50,000 within a specifi c time period. An option written on a particular house, means that you have the RIGHT to purchase that house at $1 million within a specifi c period of time.

Note that an Option gives you the RIGHT to purchase the asset and NOT the OBLIGATION. In other words, you can choose to exercise your right to purchase the asset within the time period or choose not to.

Similarly, when you have a ‘Stock Option’ written on a stock like American International Group (symbol: AIG), you have the right to buy AIG stock (usually in lots of 100 shares) at a specifi c price (e.g.$65) within a fi xed period of time (e.g. one month). This type of stock option that gives you the right to buy a stock at a particular price is called a CALL OPTION. (i.e. you have the right to call the
stock from someone).

Another kind of Stock Option is known as a PUT OPTION. This type of option gives you the right to SELL a particular stock at a pre-determined price (e.g. $65). So if you have a PUT OPTION written on AIG stock, you have right to sell the AIG stock at $65 or choose not to. (i.e. you have the right to ‘put’ the stock to someone else). Let explore these two types of options in greater detail and how investors use them to make huge returns." Read the rest of the book 'Secrets of Millionaire Investors' by Adam Khoo.


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