Calls and puts are the two types of options contracts. An option is a derivative security which gives the holder the right to buy or sell the underlying security during a specified period. Options are widely traded and can be traded on stocks, commodities and futures markets. Standardized put and call contracts give option traders a wide range of strategies to generate profits. Difference Between Selling a Put Option & Buying a Put Option Definition of Call & Put Options Identification An option contract is the right to buy or sell an underlying stock at a specific price for a specific time period. An option to buy the security is a call option and a put option is an option to sell the security. The price at which an option can be exercised is called the strike price. Expiration dates are on the Saturday following the third Friday of the expiration months. Contract lengths range from one month out to two years. Each option contract is for 100 shares of the underlying stock.
Function A call option buyer pays a premium to purchase the option contract with the right to purchase the underlying stock at the strike price. The option seller keeps the premium and must deliver the underlying stock if the buyer elects to exercise the option. The buyer is said to be long the call option and the seller has gone short the contract. Put options give the buyer or long side the right to sell the underlying security at the strike price. The seller is short the put contract and must buy the underlying stock if the long option holder elects to exercise the contract.
Sponsored Links
Call Put Option From Rs10,000 To 270,000 In 3 Month Earn 200-300% Per Month or depends on what type of options you have given for either purchase or sale
Features The value of an option is based on the price of the underlying stock, the strike price and the time remaining until expiration. An example: a call option has a strike price of $25 and two months remain until it expires. If the underlying stock is below $25, the call option is said to be out-of-the-money (OTM). If the underlying stock is above $25 the option is in-the-money (ITM). At-the-money (ATM) has the stock same as the strike price: $25. Put options are ITM if the stock price is below the strike price and OTM when the stock price is above the strike price.
Pricing If an option, put or call, is in the money it has intrinsic value. For example, the underlying stock is at 28 so the call option has 3 of intrinsic value. A put option with the same 25 strike price has no intrinsic value. The price of the call option is 4, so the remaining 1 is what is called time premium. Our OTM put option costs 1 and the price is all time premium. The time premium exists because during the time until the contract matures the underlying stock could drop below 25, giving the put option some value. Remember, an option contract is for 100 shares of stock, so an option with a price of 1 costs 100 plus commissions.
Potential Call option owners want the value of the underlying stock to rise above the strike price and keep climbing. Each 1 gain in intrinsic value is another 100 in profit. The call option holder can exercise the option to buy the underlying at the strike price and resell it at the market price to realize the profit, or just sell the option contract before expiration and pocket the gain. Option sellers want the stock to reach the expiration date out-of-the-money so they can keep the premium paid and not have to deliver the stock. Put option buyers want the stock price to drop below the strike price. The further the drop, the greater the profit. Put sellers want the stock to stay above the strike price of the option until expiration.
CAclubindia
