How Option Contracts Work

This Element is an excerpt from Options Trading for the Conservative Investor (9780137042005) by Michael C. Thomsett. Available in print and digital formats.
Understand the rules of option contractsóand use that knowledge to select better, more profitable strategies.
Let us examine the rules of the option contract. The mechanics of expiration, strike price, and time and intrinsic value affect all decisions related to how you should or should not employ options and how risks increase or decrease as you employ a particular strategy. We will start by understanding how the attributes of the option contract determine its value....