## Getting Started With Options

### What are options, futures and stocks?

A **Stock** represent a fraction of the ownership of the comapny/assets. A unit of stock is called shares. The price of the shares is decid ed by the demand and supply of the shares. (Investopedia Link)

A **future** is a contract to buy the stock at the set price regardless of the current price. Futures have expiration date and a set amount that are sold for a premium. One can purchase future for a premium to limit the risk of the price change. Once the future comes to an end the buyer is obliged to puchase the underlying assets. (Investopedia Link)

An **option** is similar to the futures, bu t it provides user the choice of accepting or refusing to buy the assets/stocks at the time of expirations.(Investopedia Link) These are of two types.

**Call Options :** Gives buyer the option to purchase the stock/assets at predetermined price. (Investopedia Link)

**Put Options :** Gives buyer the option to sell the stock/assets at predetermined price. (Investopedia Link)

#### Moneyness

**Moneyness** refers to the state of profit/loss with respect to the underlying stock or asset’s current or future price. (Investopedia link) There are 5 types of of moneyness

- Deep In The Money
- In the Money
- At the Money
- Out of the Money
- Deep Out of the Money

## Elementary strategy

#### 1. Simple Buy and Sell Strategy

Above is the profit/loss to underlying price diagram for all possible trades with a single option.

Depending how we feel the the price of the underlying is going to change, we can sell/purchase the call/put options accordingly.

We might think that one can always buy call option due its limited risk and the unlimited profit and no one will sell a call option due to its unlimited loss and limited profit. We need to take into account the probability of this huge price change, which is very low.

#### 2. Combination Strategies

When considering the option trade we need not to limit ourself with purchase or sale of an individual option. We can create our profit/loss graph with combining differnet options.

For example if we buy a call option and a put option or we sell a put option and a call option. we can alter the graph as below.

This graph can further be changed with purchashing options of different values and buying/selling a call/put option.

### How to construct a expiration graph

As of the above diagrams we can conclude that :

If the graph bends, it will do so at an exercise price. We can calculate profit/loss at each exercise price and simply connect points with straight line.

### Terminology

`underlying asset`

or`uderlying`

: The asset to be brought or sold under the term of the option`exercise price`

or`strike price`

: The price at which the underlying will be delivered if the holder chooses to exercise his right to buy/sell.`expiration date`

: date after which the option may no longer be exercised.