An option contract includes the underlying asset, strike price, expiration date, and the option premium (cost of the option).
- Strike Price: The price at which the underlying asset can be bought or sold.
- Expiration Date: The date by which the option must be exercised or it becomes worthless.
- Premium: The price paid upfront to buy an option contract. The premium is quoted per share. So the actual price paid for one option contract is the premium multiplied by the lot size. The premium has an ask price (to buy) and a bid price (to sell)
- Ask price: The ask price is the amount sellers in the market are willing to receive for an options contract. (i.e., what the buyer should pay) The ask price will always be higher than the bid price.
- Bid Price: The bid price is the amount buyers in the market are willing to pay for an options contract. (i.e., what the seller can sell for) The bid price will always be lower than the ask price.
- Types: Options can be classified as call options (allowing purchase of the asset) or put options (allowing sale of the asset).
- Lot size: Each option contract allow you to buy or sell a specific amount of its underlying asset. For American options which are available on Sarwa the size is always 100 shares per contract.
- Break-even price: The breakeven point of an options contract is the point at which the contract would be cost-neutral if the owner were to exercise it. It’s important to consider the premium paid for the contract in addition to the strike price when calculating the break-even point.