Call Option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.
Put Option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. For example, if you have one Mar 08 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until March 2008 (usually the third Friday of the month). If shares of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each, which means you make $500 (100 x ($10-$5)) on the put option. Note that the maximum amount of potential proft in this example ignores the premium paid to obtain the put option.
Simply put a call is the right to BUY the stock at a certain price. A put is the right to SELL at a certain price. If you own an option, you can either buy (if you hold a call) or sell (if you hold a put) the stock itself, as agreed, or you can sell your option, that is, the right to buy (call) or sell (put) while it can still be exercised in the future.
The option gives you the right to buy (call) or sell (put) but not the obligation to do so.
If you decide to buy (call) based on your call option, actually doing it is called"exercising" the option. Similarly for put options, if you decide to sell, actually doing it is called "exercising" your option.
If you decide to sell someone else an option to buy (a call) stock that you already own, this is called a "covered call". It is one of the safest ways to participate in the options market.
Selling options is another way to participate in the options market. You can either buy them and sell them, or you can create one. This is called writing an option. You will receive a fee If you sell an option for the option itself. If it is a call, you will also receive the agreed price, if the call that you sell is exercised. If you write a call in stock that you do not own, and the buyer from you of the call exercises it, you then have to buy stock to meet your obligation, and this will virtually always cost you money, since the buyer of the call will not exercise it unless it is "in the money", which means that the call price is lower than the market price.
Options are more volatile than the underlying stock. They can move quickly and significantly. You can make, or lose a lot of money in a hurry.
Trading in options, and/or writing them can be exciting, but it is risky. Substantial study of the topic is recommended before engaging in it.
No comments:
Post a Comment