A guide for options basics: Puts & Calls

Options are known to be a security measure which is derivative in nature due to the fact that it can be internally linked to the price of some other commodity. These are often regarded as contracts and not an obligation to buy or sell an asset at a given price.  Calls and puts are two options which are used for the buying and selling prospect respectively. The call option can be regarded as a deposit that can be made for the future whereas the put option can be thought of as insurance for the future.

The call option is so called because the owner has the right of calling the stock away from the seller although the owner does not has the obligation to buy the stock at a present-day price of the stock. In this case, the owner does not need to always buy the stock, and rather can call it off and let it expire of the exchange price seems to be unprofitable. Moreover, since these options provide the owner with the power to buy a stock at a given price which is usually fixed, you can buy them at a much lower market price. The best part about owning a call option is that the profit that you would subsequently earn would be unlimited and the loss would just be the amount that you might have paid for the particular option. With this, you would also be able to book a particular stock at the maximum purchase price.

When we talk about the put option, it acts as a security when are doubtful that the price of the stock would go down on a certain date. It is defined on the basis of four options which mainly comprise of its expiry date, strike price on a particular day. With this option, you have the right to sell the stock or index to someone else. Owning a put eventually allows you to lock the minimum price for selling a stock. If the market price seems to be higher than the strike price, then you can trade the stock at a high market price instead of exercising it. There are three ways in which you can ensure that you can earn profit from the falling prices of the stock which are as follows: short the stock or index, write a call option for the given stock, or buy a put option on the stock.

There are four cardinal coordinates associated with the buying and selling of calls puts which are as follows: owning a call option would give you are long hold in the market, and the seller would be put at a short position and the vice versa for the same is applicable for the put option. People who happen to buy options are referred to as the holders and those who sell options are called the writers of the options. To distinguish between the buyer and the seller, you need to consider the points listed below:

Buyers in the case of both call and put holding are not obligated to sell or buy the stock although they have the choice to exercise their rights if they want. This eventually limits the risk which is associated with the buyers and they can only lose their premium in case of a loss.

When it comes to the call and put writers or sellers, they are obligated to sell or buy the given stock. They are often on an unlimited risk, where they have the tendency to lose more than the price of the premium.

Post Author: Jennifer Slegg

Leave a Reply

Your email address will not be published. Required fields are marked *