Stock Options: Calls and Puts Articles

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Latest Articles

Stock Articles :: Stock Options: Calls and Puts

Exercising Stock Options

In order to understand how to exercise one's stock options it would be best to have a review of the important stock option concepts. A stock option is a contract wherein the holder has a right, but not necessarily the obligation, to buy (or sell) 100 shares of stocks for a specified price in a given period. The holder must pay the premium, which is the price to be paid to be able to own stock options, which is separate and distinct from the stock price....

Frequently Asked Questions about Employee Stock Options

What is an employee stock option?

An employee stock option is a stock option given by the employer, which is usually the corporation, to the employee wherein the employee can buy specific shares of the company's stocks at a specific price before the expiration of the stock option. The specific price in which the stocks can be bought is called the strike price or option price or exercise price and this....

Incentive Stock Options

There are generally two kinds of stock options: calls and puts. But have you heard of employee stock options? Employee stock options are like call options but the writer is the corporation, the holder is the employee and the share of stock involved are those of the corporation's. There are two kinds of employee stock options: Incentive stock options (ISOs), also known as qualified or statutory stock options, and Non-qualified stock options (NQSOs) or....

Non-qualified Stock Options

Have you ever wondered what NQSOs are and why they are used by corporations? I mean, why would an employer intentionally choose an employee stock option that has no tax incentive both for the employee and the corporation? To better understand the world of NQSOs let me explain how they work.

NQSO of Non-qualified stock option is a kind of employee stock option offered by the companies to their employees,....

Pricing of Options

We all know that stock options are bought and sold in the stock market for a particular price. This price has been called the premium or a stock option's selling price. But have you ever wondered how a stock option's price comes about? I mean, who determines them and what possible factors could affect a stock option's price? To answer these questions and help you understand more of pricing options, I have prepared a short discussion on stock option prices and....

Stock Options: An Introduction

For people that are unfamiliar with stock options, the idea would seem confusing even dumbfounding. For those that have already heard of stock options, the concept of investing or trying out options can be intimidating, even to the point of driving you away. The first thing that you should know about stock options is that it is risky. But then again, investing in the stock market is risky for anyone. What is rather sad is that people tend to walk away from....

Stock Options Vocabulary 1

American Style Option: a style of option in which the option contract can be exercised any time before the expiration period. Most options that are traded in stock exchanges are American styled.

Assignment: this happens when an option seller, called a writer, has received an exercise notice in which the writer is obligated either to sell the stocks (in case of calls) or to buy the stocks (in case of....

Stock Options Vocabulary 2

Exercise strike: the other name for strike price.

Exercise settlement amount: this is calculated by subtracting the exercise price of the option and the exercise settle value of the index in the day when the option was exercised, multiplied by the index multiplier.

Expiration date: the last day in which the holder can exercise the option by submitting an exercise notice.....

Stock Options Vocabulary 3

Put: a type of stock option that gives its holder the right to sell 100 shares of stock for a specified option price which can be exercised for a specified period.

Restricted Stock Option or Restricted Stock: is a term used to describe an employee stock option that has certain restrictions imposed by the employer.

Secondary Market: is the market where the previously sold and bought stock....

Strategies in Buying Calls I

Are you interested in learning some strategies on how to maximize your call options by either profiting more or at the very least minimizing losses? If you are, then read on as I present to you some strategies you can employ using call options. Note, however, that for purposes of simplicity, tax considerations, commissions as well as transaction costs have been omitted in my illustrations. Also, the call options here are assumed to be American style, which....

Strategies in Buying Calls II

We know that investors buy call options to gain from an increase in the price of a stock or to lessen losses in case the stock price decreases. But, what other ways can call options be used to gain money? Other than profiting from an increase in the stock price or lessening your losses for a decrease in the stock price, investors also buy call options to give them more time in gathering the money needed to buy that stocks or to insure short stock sales.....

Strategies in Buying Puts I

You might be wondering how one can benefit from buying puts or if ever there can be any benefit at all in buying puts. Well, I've got news for you, you can profit in buying puts and I am here to show you how. Note, however, that for purposes of simplicity, tax considerations, commission, as well as transaction costs have been omitted in my illustrations. Also, the call options here are assumed to be American style, which means that the call option can be....

Strategies in Buying Puts II

There are various strategies in handling your stocks that can both help you earn your profit but at the same time limit your losses by hedging. Some of these strategies involve buying puts. Just to review, a put is a kind of stock option that gives its holder the right to sell 100 shares of stock for a specified price, called a strike price, for a certain period. To be able to own this right, an investor must first pay a premium for the put, which is the....

Strategies in Buying Puts III

Other than to profit in the decrease of stock prices as well as to minimize losses in case of a stock price increase, one can also buy puts as a form of strategy to protect a long position from short periods of stock price decline. A long position in puts means that an investor has bought more put options for a particular series of options as compared to the number of put options he sold. To understand an option series one has to understand a....

Strategies in Covered and Uncovered Put Writing

Writing covered or uncovered put options can also be profitable. In writing a put option, the writer can be obligated to buy 100 shares of stock at the strike price any time before the expiration period. In exchange for assuming this risk, the holder of the put option pays a premium for that put option. You are considered a covered put writer if you own the equivalent short stock position or if you have deposited to your broker the amount of money that is the....

Strategies in Selling Covered Calls

Other than earning and hedging in buying calls and puts, investors can also earn profits by selling covered calls. If you sell a call option this means that at the price of the premium you will create an option contract where you are obligated to sell 100 shares of stock if the buyer of the option chooses to exercise that option. If you sell a covered call this means that when you sell the call option you actually own the underlying stock of that call option.....

Strategies in Selling Uncovered Calls

You may be wondering what uncovered calls are and what possible strategies one can employ to profit from uncovered call writing. To be honest writing uncovered calls can hardly be called a strategy as the risks involved are far greater than the profit the writer could possibly make. However, it is not entirely impossible to benefit from uncovered call writing in the same way as it is not entirely impossible to benefit from shorting stocks. Before I begin my....

Tax Implications of Incentive Stock Options

You have probably heard that employee stock options (ESOs) are continuously being used by corporations to retain their employees and to lure in new skilled and intelligent employees. You have also probably learned that an ESO is a kind of call option wherein the corporation writes a contract whereby the employee can exercise his right, as holder of the option, to buy shares of the corporation's stock at an option price for a specific period of time. In....

The Expiration Process and LEAPS

We all know that an option contract typically has the following elements: type, which can either be a right to buy shares of stock (called calls) or the right to sell shares of stock (called puts); style, which can be American, European or Capped, depending on when you can exercise the option; underlying security which, more often than not, are shares of stocks; unit of trade consisting of the number of shares; the strike price or option price and....

Things you should know about Employee Stock Options

The thought of owning, let alone exercising, an employee stock option can be very intimidating to some. Questions of how profitable an employee stock option can be and how much risk it will entail to exercise them often arise. There are some employees who are wondering if they can exercise their employee stock option even if they have insufficient money, while others wonder how they can get their boss to allow them to have employee stock options too. To answer....

Understanding Options

Understanding options in the stock market is difficult for any beginner. It involves complex abstractions and a lot of seemingly complicated words. To help you understand stock options more I will discuss and define some of the technical words used in the stock market.

Call and Put

First of all, an option is the right one has to either buy or sell 100 shares of stock at a....

An Introduction to Stock Options

You probably know that there are two ways to earn profits in the stock market: cashing in your dividends or earnings per share (EPS) and earning capital gains by buying and selling stocks. But did you know that you can earn money even if you don't actually have to buy or sell those stocks? You only have to write options. What do I mean? Read on.

Options

So you already....

Benefits of Stock Options

You may have already heard of what stock options are and how they work. May be you are interested in trying out stock options yourself, yet you still have misgivings in risking that much earned money. To further help you in your decision, I enumerated some of the reasons why people try out stock options.

To recap, stock options is a kind of contract that gives its holders the right but not necessarily....

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.

Comparing Stocks and Stock Options

Stock options have a lot of similarities and differences with stocks. To understand stocks and stock options better, I have prepared a comparison of stocks and stock options.

Similarities of Stocks and Options

One of the most glaring similarities with stocks and stock options is that they are listed securities. In buying and selling either stocks or stock....

Employee Stock Options

As you may well know, employee stock option is a benefit given by a corporation to their employees. Instead of giving them higher salaries, some corporations opt to provide their employees of the option to buy shares of stock of the company at a certain price within a specified time. There are two kinds of stock options that receive tax benefit from the government: the incentive stock options (ISO) and the employee stock purchase plan (ESPP). ISOs and ESPPs are....