Conclusion

During our previous lessons, we had a look at what options are and drew parallels with insurance policies. We touched on some terminology (there will be some more later on) and we discussed that options have very specific and well-regulated rules.

Here is a quick recap of what an Option specifies:

STRIKE PRICE:

The price for which a policy is valid and at which we will conduct business if that price is reached.


EXPIRY DATE:

After the expiry date the option expires, it is no longer valid. The buyer of the option can do something with the option until the expiry date has been reached but after that date, the option becomes null-and-void.


DIRECTION:

The direction in which we want to trade. For a Call Option, the buyer will BUY the underlying commodity at the Strike Price and for a Put Option, the buyer will SELL the underlying commodity at the Strike Price.


PREMIUM:

The price at which the option trades. The buyer of an option pays the premium to the seller and that premium is non-refundable.
The option is worthless and you cannot do anything with it until the price of the underlying market EXCEEDS the Strike Price specified by the option.

For a Call Option, exceeds means “until the price of the underlying goes above the strike price” and for a Put Option, exceeds means “until the price of the underlying goes below the strike price”.

Once this happens we say the Option is “moving into the money” and it is no longer worthless, it now starts to build value.

Now that we had a look at what options are, we can move forward and discuss how they can be traded.