Trading options contracts is essentially leveraged trading. To trade 100 shares of AAPL with an average share price of $150, it would cost $15,000.
1 options contracts gives you the right to buy 100 shares for a premium per share.
Premium on an AAPL contract may be $3.00 per share. Therefore, you only have to pay $300 to trade 100 shares of AAPL (remember each contract carries 100 shares).
Be aware with increased leverage comes increased risk.
Here’s an example contract:
AAPL 10 JUNE 2022 $150 Call at $3.00
AAPL = Ticker
Underlying ticker. Premium pricing will react to AAPL price changes.
10 JUNE 2022 = Expiration Date
Date at which the contract will expire. The contract must be closed prior to market close on this date. Keep in mind, you can and should close your contracts prior to the expiration date.
$150 = Strike Price
Price at which the contract will be deemed worthless. For Calls, AAPL underlying price must close above $150 on said expiration date. If this were a Put contract, AAPL underlying would have to close below $150 on said expiration date.
Call = Long or Short
Call = Long, Expect AAPL underlying price to INCREASE.
Put = Short, Expect AAPL underlying price to DECLINE.
$3.00 = Premium
Cost of the contract per share. Remember, each contract contains 100 shares. If we bought 3 – AAPL 10 JUNE 2022 $150 Call at $3.00 then we’d be paying:
3 Contracts * $3.00 Premium * 100 Shares = $900
Premium is what is traded compared to share price in normal trades. If premium increases from $3.00 to $4.00, you have a 33% return.