The Two Types of Stock Options
The trade of stock options is on the rise these days. With their many trading advantages and promises of greater returns, many investors have become quite interested in buying and selling such contracts. In order to be able to make money trading options, it is important that you understand the two types of stock options that are available to you. Read on.
The two major types of option stock option contracts are known as a call option and a put option. Each of these types holds different rights and benefits for you, as the owner.
Call Options
A call option gives its owner the right to buy the underlying stock at a particular fixed price (also called the strike price) within a certain time frame (on or before the expiry date of the contract). The buyer of a call has the right to purchase shares at this strike price until the expiry date.
The writer (the seller of the call option) on the other hand, holds the obligation to sell. If a call buyer chooses to exercise his or her option by deciding to acquire the underlying share, then the writer must sell his or her shares at the strike price.
For example, an investor buys a call option in Company A with a strike price of $10, which will expire in two months, then that buyer has the right to exercise his or her option by paying the value of $10 for each share. The writer, on the other hand, would be bound to give up those shares by exchanging each of them for $10.
Put Options
Basically, a put option is the exact opposite of ta call option. It is a contract that allows one to sell the underlying shares at a specific price on or before the expiry date. A put buyer holds the right to sell the stock at the strike price, and after this, a put writer will then be obliged to sell at the negotiated price.
Thus, if investors who have acquired the stocks of a company have growing concerns that the business may not fare well in a market slump, they can purchase a put option at a certain strike price in order to ensure the safety of their gains, since they are expecting the company’s stock price to fall.
These investors would then hold the right, until the expiry date, to be able to trade their stock shares for the same amount they paid for them. Sellers of the put are then obliged to buy back these stocks. If in the event that the company did particularly badly during the market slump, then this may hurt the seller.
Knowing some detail about the distinctions between these two types of stock options is a major step than will help you in making better decisions in stock options trading. Ensure that you clearly perceive the risks involved in each type. This knowledge will help you to consider the current behavior of the stock market before making the decision whether to buy a call or put option, or whether to buy options at all.
