Options Basics: Option Investment, How It Works?

As all other investments, the principal of option investment is "buy low and sell high". As we know, the premium of stock option is the summation of intrinsic value and time value. The increase of either intrinsic value and time value will increase the value of the option investment.

What factors may change an option's intrinsic value? Any variable that can change the stock price of an underlying asset may change the intrinsic value. For a call option, strong earnings report and guidance, positive management discussion, news of being an acquisition target, etc are some factors that can positively change the stock price and increase the intrinsic value of a call option if the stock price surpasses strike price.

For a put option, factors such as negative earnings report and guidance can change the strike price negatively and increase the intrinsic value of a put option if the stock price drops between the strike price.

So, if you anticipate the stock price will fall, buy put option. If you expect the stock price to go up, buy call option.

Posts that discuss options basics:
What's Stock Option?
Premium, Intrinsic Value and Time Value
Option Investment, How it Works?
Why Option Investment?
What's the risk?