An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset a stock or index at a specific price on or before a certain date listed options are all for shares of the particular underlying asset. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. For most casual investors, that definition may as well be written in ancient Greek.
Then you can either keep the shares which you obtained at a bargain price or sell them for a profit. But what happens if the price of the stock goes down, rather than up? You let the call option expire and your loss is limited to the cost of the premium. When you hold put options, you want the stock price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price. Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value.
Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively. If not, you'll probably loose most or all the money you paid for the option. Options are very sensitive to changes in the price of the underlying stocks.
Like gambling you can make or lose money very quickly. Because option prices change quite rapidly, owning them requires that you spend a significant amount of time monitoring price changes in the stock and the option. And if you're wrong about the price movement, be prepared to lose all or a significant portion of the money you paid for the options. A call is a contract that gives the owner the right, but not the obligation, to buy shares of a stock at a fixed price, called the strike price, on or before the options expiration date. If the value of the stock goes down, the price of the option goes down, and you could hold it or sell it at a loss.
The price that you pay for a call option depends on many factors two of which include: the duration of the contract the longer the duration, the more you pay and how far the current price of the stock is from the strike price of the contract. If you own a stock, you may buy a put as a form of insurance. If the stock falls in price, the put rises in price and helps offset the paper decline in the underlying stock. If you don't own the stock but think it will go down in price, you buy the put to profit from the decline in price of the stock. If the stock price declines, the value of the put rises and you would sell the put for a profit.
Puts vs. Calls in Options Trading: What's the Difference? • Benzinga
If the stock increases in price you may sell the put for a loss. A put option is a contract that gives you the right, but not the obligation, to sell a stock at a preset price. The price that you pay for a put option depends the duration of the contract the longer the duration, the more you pay and how far the current price of the stock is from the strike price of the contract.
Put buying is different from selling short. With a put option your only liability is the price you paid for the put. With a short sale, you have an unlimited downside liability if the stock goes up. Also, the proceeds from selling short are in a margin account so you have to pay interest and meet margin requirements.
Buying puts is a more conservative way of betting on a stock declining in price. In most cases you must own shares of the stock for each contract you sell - this is called a covered call. Therefore, if your stock gets called away, you have the shares in your account.
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You can sell covered calls to generate a stream of income. If the stock price does not rise enough during the period of the contract, you won't get called and won't have to sell the stock so you keep the money you received when you sold the call. If your broker lets you, you may sell "uncovered "or "naked" calls in a margin account.
This practice lets you sell calls when you don't own the stock. If you get called, you must buy the stock at its current market value to cover the call even when the market price is higher than the strike price of the option.
Like any margin account transaction, you must execute the transaction immediately. The seller of a put collects the purchase price of the option from the buyer of the put. The seller has the obligation to buy shares at the strike price regardless of the market value of the underlying stock.
So if the put buyer decides to exercise the put contract, the seller of the put has to buy the shares at the strike price no matter the current market value of the stock. When you sell a put, you want the price of the stock to go up so you don't get the stock put to you - buy the stock for more than it's worth. Selling a put places the money you receive in a margin account so you pay interest on the proceeds until the put contract is closed. If you don't have the financial resources to cover the obligation of buying the stock from the buyer of the put, you sold "naked puts".
Long call options vs. long put options — what 'going long' in options trading means
Use calls and puts judiciously. If you're right, you can make mone quicklyy. If you're wrong, you can lose part or all of your investment very quickly. Do not sell "naked" options.
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You may be inviting a financial disaster. Knowledgeable, experienced investors may want to sell covered calls and puts to collect other peoples money. Because the price of options can change very quickly and dramatically, you must continually watch their price movement. If you not prepared to do so, don't buy or sell options. Options - Understanding Calls and Puts Call and put options are examples of stock derivatives - their value is derived from the value of the underlying stock.
Buying a Call A call is a contract that gives the owner the right, but not the obligation, to buy shares of a stock at a fixed price, called the strike price, on or before the options expiration date. You may sell the option for a profit or loss anytime before the contract expires.