Put and Call Stock Options basics
This is a 2-part brief explanation of stock options. PART 1
One of the many fascinating attractions of the stock market is its many choices and options for you to make better decisions while doing the business.
Contrary to what some people think, the stock market is doing everything to try to make everyone a winner. It is good that you should be familiar with the stock market’s options.
Stock options
Stock options are contracts to buy (or sell) stocks at a particular price at a future time. Stipulated in the contract is the option of the buyers of not being obligated to exercise their right to buy the stocks.
However, the option sellers have the obligation of selling underlying stocks if the buyer wishes to buy them presently.
Call option
Call option is the name to describe a contract to buy. Buyers hope prices will rise so that they can have the stocks for a lesser value.
Meantime, the call option sellers either do not expect changes in the stock prices or they accept partial loss of profits made from selling the call options.
Sample call option
An investor might buy a call option on IBM (for instance) with $50 strike price. The price is the same as the current price in $40 and the cost call of $5.
If the stock price rises above the combined amount of the strike price and the cost of the call price, the buyer can exercise his right to buy. He makes a profit by reselling the stocks.
He seller also gains from the price increase of $55 from the original $40 plus the sold call at $5. If the price stays below $55, the call is not exercised.
The seller, however, gains $5 and the buyer loses $5. (The stocks are usually traded in lots of 100.)
Continue to Stock Market Option Basics part 2
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