An outright option is an option that is bought or sold individually. This option isn’t part of a spread trade or any type of complex options strategy where multiple different options are purchased.
Key Takeaways
- An outright option is purchased individually, separate from a multi-leg options trade.
- Outright options include basic calls and puts, traded on single underlying securities.
- These options are exchanged similarly to securities like stocks.
Understanding the Outright Option
An outright option — encompassing both calls and puts — can refer to any basic option on a single underlying security. They represent the fundamental start to options trading.
Outright options trade on numerous exchanges in the United States, catering to both institutional and retail investors. While institutional investors might use options to hedge against risk or focus on options as part of their investment strategy, retail investors often view options as either an advanced maneouver or a cost-effective alternative to directly buying the underlying asset.
Accessing options trading typically requires more than just a general brokerage account; often, a margin account and a minimum deposit of around $2,000 is needed.
When trading outright options, investors generally focus on calls or puts, which are standardized in 100-share increments. This means one option controls 100 shares of the underlying stock. Option premiums are quoted per share — for instance, a $0.50 option will cost $50 to buy ($0.50 x 100 shares).
Advanced options strategies like spreads and exotic options are not considered outright options. Spread strategies use two or more option contracts in a single trade, while exotic options have varied constructions and are based on baskets of underlying securities.
Outright Call and Put Options
An outright option refers to a single call or put option. A trader buys or sells one or the other as a directional bet on the underlying asset or as a hedge. Buying an option is termed a “long option,” and selling one is a “short option.”
A long call option allows the buyer to purchase an underlying security at a specific strike price up until the option’s expiration date. The seller keeps the premium but is obliged to sell the security to the buyer if the option is exercised.
Conversely, a long put option grants the buyer the right to sell an underlying security at an agreed strike price. The seller gets to keep the premium but must buy the security from the put buyer at the strike price if exercised.
Call and put options have expiry dates: American options can be exercised at any time before expiry, while European options only at expiration.
Real-World Example: Apple Inc.
Assume you’re optimistic about Apple Inc. (AAPL) and believe its stock will rise in the upcoming months. To act on this, you buy a call option. Suppose Apple’s stock is trading at $183.20 on May 22, and you expect it to surpass $195 by August.
You can choose an in-the-money option, such as buying the $170 strike price August call for $19.20, costing $1,920 ($19.20 x 100 shares). If the stock hits $195, the option will be worth approximately $25, netting you a $580 profit.
If the stock falls, you risk losing the entire $1,920 premium. Nevertheless, you could sell the option prior to this scenario to recover some of the costs.
Alternatively, you may opt for a near or out-of-the-money call option, such as a $185 strike price option priced at $9.90, costing $990.
If by expiry the stock trades near $195, you’ll only net a profit of $10. For a significant gain, the price needs to exceed $195—if it reaches $200, you’ll make a profit of $510.
Comparing both scenarios, choosing the latter option requires a greater price movement for profitability. The stock’s performance determines ultimate trade results, emphasizing whether options trading aligns with your risk tolerance and financial goals.
Related Terms: Options Trading, Call Option, Put Option, Strike Price, Premium, Hedging, Institutional Investors, Retail Investors
