Page 245 - A Canuck's Guide to Financial Literacy 2020

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▪ Strike Price – The strike price is the price that you are allowed to buy the underlying
stock
▪ Premium – The price of the option that an individual would pay
▪ Expiration Date – The expiry date when the option expires and is settled

Each option is known as a contract and each contract represents a claim of 100 shares of
the underlying stock. Option prices are quoted in terms of per share price and not the total
price that you may pay.

For example, Jim is planning to buy 1 option of American Airlines. The price is quoted at
$0.85. His total premium to purchase one contract will cost $85. (100 shares x 1 contract *
0.85)

Call options may be in the money or out of the money. They’re considered in the money
when the stock price is above the strike price at the expiration date. The owner of the option
can exercise the option by utilizing cash to buy the stock at the strike price. If the owner of
the option is not interested in exercising the option, they can sell it another buyer.

For example, Jim has 1 option of American Airlines with a strike price of $50. The stock is
currently trading at $55 per share. Jim has the option to buy 100 shares of American
Airlines at $50 by exercising the option and utilizing cash to purchase the shares. By
exercising the option, Jim can go ahead and sell the shares at $55 each.

It’s important to factor in the premium as well. Jim would profit if the premium paid is less
than the difference between the stock price and the strike price. For example, he bought the