An option gives you the right (but not the obligation) to buy or sell a stock at a set price before a certain date. Call options profit when the stock rises; put options profit when it falls. Options can hedge or speculate.
Answer: Buy shares at the strike price. A call option is the right to BUY the underlying stock at the strike price before expiration.
Answer: Falls below the strike price. Put options gain value as the underlying stock falls — they're used to hedge or bet on declines.
Answer: The price paid to buy the option. The premium is what you pay upfront for the option contract — your maximum loss if the option expires worthless.
Answer: They are out-of-the-money at expiration. Out-of-the-money options at expiration are worthless — the buyer loses the entire premium paid.
Practice this with $10,000 in virtual cash in Tradecraft, free paper trading with real market data.
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