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Calls and Puts
In trying to understand stock options, you have to know that there are two kinds of stock options: Calls and puts. Calls and puts are at the opposite end of the stock option spectrum. One involves the right to buy stocks and the other involves the right to sell stocks. In either case both stock options involve taking risks and both options require that the option holder pay the premium to have that stock option.
A call is a type of stock option which gives its holder the right to buy shares of stock at an agreed price on or before a specified time. Those that buy call options are hoping that the price of the shares of stock increase by more than the agreed price in the stock option so that they can profit from buying that stock.
A put, on the other hand, is a type of stock option which gives its holder the right to sell shares of stock at an agreed price on or before a specified time. Those that buy put options are said to be bearish as they are hoping that the price of a stock be lower than the stock price agreed upon so that they can sell their stocks at a price higher than the prevailing share price.
There are two types of people involved in stock options. Those that sell stock options are called writers and those that buy options are called holders. Holders do not have the obligation to buy or sell the stocks. They possess the right of buying or selling the stocks. In other words, holders have the power to choose whether they want to exercise their rights or not. Writers, on the other hand, do not posses the power to choose whether they want to buy or sell the stocks that they have. Once the holder chooses to exercise his rights, the writer has no choice but to either sell or buy the stocks agreed upon.
A strike price, which is usually set by the stock market, is the price in which the 100 shares of stock that is the subject of the stock option can be bought or sold. For those that have calls, they are rooting that the stock prices go above the strike price so that they can buy cheaper stocks than what is sold in the stock market. For those that have puts, they want that the stock price in the stock market be lower than the strike price so that they can sell their stocks at a higher price than the prevailing price in the stock market.
A call option is said to be in-the-money if the strike price is below the prevailing stock market price of stocks whereas, in put options, it is said to be in-the-money if the strike price is above the stock price. The difference between the stock price and strike price is called the intrinsic value.
It is understandable that people may have apprehensions in investing in stock options. But knowing about stock options and how they work is the first step in making an informed decision.
A call is a type of stock option which gives its holder the right to buy shares of stock at an agreed price on or before a specified time. Those that buy call options are hoping that the price of the shares of stock increase by more than the agreed price in the stock option so that they can profit from buying that stock.
A put, on the other hand, is a type of stock option which gives its holder the right to sell shares of stock at an agreed price on or before a specified time. Those that buy put options are said to be bearish as they are hoping that the price of a stock be lower than the stock price agreed upon so that they can sell their stocks at a price higher than the prevailing share price.
There are two types of people involved in stock options. Those that sell stock options are called writers and those that buy options are called holders. Holders do not have the obligation to buy or sell the stocks. They possess the right of buying or selling the stocks. In other words, holders have the power to choose whether they want to exercise their rights or not. Writers, on the other hand, do not posses the power to choose whether they want to buy or sell the stocks that they have. Once the holder chooses to exercise his rights, the writer has no choice but to either sell or buy the stocks agreed upon.
A strike price, which is usually set by the stock market, is the price in which the 100 shares of stock that is the subject of the stock option can be bought or sold. For those that have calls, they are rooting that the stock prices go above the strike price so that they can buy cheaper stocks than what is sold in the stock market. For those that have puts, they want that the stock price in the stock market be lower than the strike price so that they can sell their stocks at a higher price than the prevailing price in the stock market.
A call option is said to be in-the-money if the strike price is below the prevailing stock market price of stocks whereas, in put options, it is said to be in-the-money if the strike price is above the stock price. The difference between the stock price and strike price is called the intrinsic value.
It is understandable that people may have apprehensions in investing in stock options. But knowing about stock options and how they work is the first step in making an informed decision.
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