Trading Terminology: The Bare Bone Basics

Updated: Aug 1, 2021

Hey everyone! I'm new here. Let's get to know

each other.

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Please feel free to conduct the virtual equivalent of throwing rotten vegetables at me if what I blog about is terrible... but before you do that, I welcome all feedback and encourage the sharing of ideas for future blogs! With that being said, my first post here will be about basic trading

terminology. Moving forward, I will post some watchlists and a recap here and there accompanied by some educational posts.


I want to start by saying I am not a trained professional in the finance world. I am a 24 year old guy who works as a Project Engineer at a construction company during the day and loves researching all things investing in the evenings (and lunchtime) with the goal of becoming financially free by creating multiple streams of income, one of which is investing/trading . The stock market has been a passion of mine since I discovered the beast in middle school when I heard about this company Netflix ($NFLX) and told my dad maybe we should invest. At the time, I believe they were still mailing DVDs. Seeing I had little to no money in 2009, we did not invest (big yikes). Luckily, my mom bought me and my sister some Microsoft ($MSFT) stock back in 2012. I'm still holding :).


I have been trading options for the past 2 years. I started at absolute square one. And I mean SQUARE ONE. I could not wrap my head around what a call or put was. I did a ton of research before I finally grasped the concept. So that's where I'll start with you guys. I'll keep this short and sweet. My goal is to go over the basic terminology you may see tattooed on social media and other corners of the internet everyday and hopefully provoke more questions from you guys. Again, I am purposefully just skimming the surface for beginners!


What's a Call Option (aka "call") ?


The long way around the block: A call option (by the book) is, according to investopedia.com, "a financial contract that gives the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period."


What does this mean? Well, it basically means nothing to you if you buy and sell the call option before expiration. There are some other factors, but that's for another time. For you overachievers asking, "What's the specified price?" and "How long is the time frame?", I'll touch on those in a bit.


The shortcut: What you really need to know: if you do analysis and think a stock will go up, a call is the way to go. A call increases in value as a stock increases in value and vice versa. A call decreases in value as a stock decreases in value. Like I mentioned, there are some other factors, but for right now, just know that basic function.


Here's a helpful graphic because I'm a visual person and like pictures:

Credit: @Basement_Financials on Instagram



What's a Put Option (aka "put") ?


The long way around the block: Shall we call on our friends at Investopedia again? A put option is "a financial contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame."


What does this mean? Well, again, it basically means nothing to you if you buy and sell the put option before expiration.


The shortcut: What you really need to know: if you do analysis and think a stock will go down, a put is the way to go. A put increases in value as a stock decreases in value and vice versa. A put decreases in value as a stock increases in value. Read that again and let it sink it. At least for me, that was extremely counterintuitive in my head. Like I mentioned, there are some other factors, but for right now, just know that basic function.


Again, I like pictures:

Credit: @Basement_Financials on Instagram


So for the overachievers above, the "specified price" is what's called the strike price. In the case of a call option, the strike price is the set price at which the security (stock shares in this most common application) can be bought at by the option contract holder if exercised. In the case of a put option, the strike price is the set price at which the security (stock) can be sold-or short sold-at by the option contract holder if exercised.


The specified period of time mentioned above references the expiration date of the contract. This is when the contract can be executed if chosen by the holder. Most stocks with frequently traded options have weekly expiration dates. This means the contract expires after market close on that Friday specified. For example, if I buy a weekly call option which expires on Friday, July 30, 2021, the value of that contract will no longer fluctuate because it can no longer be traded i.e. it expired. The holder at the time of expiration now has the option to exercise or not.


Lastly, I want to touch on the cost of options, aka the premium. The premium is the price you pay to purchase the contract. These are displayed in dollar value, but not exactly how it would make sense. The best way to touch on this is with an example. If a contract is shown to cost $0.50, it does not cost 50 cents. It costs $50 because the price displayed shows the commitment of 100 shares. Think of it as paying $0.50 for the right to buy/sell each of the 100 shares ($0.50 x 100 = $50).


I hope I did not lose you guys on the premium explanation. I tried to keep it simple! That's how I know it's time to stop. Please like, share, comment, you know, all that fun stuff. Be nice to the like button. Please don't smash it. Just give it a little tappy tap tap taparoo.


See you next time. Comment with questions, blog ideas, educational material you want to read about, trading strategies, whatever! I'm open to all things investing/trading.



-Sabato


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