What is an Option? Put Option and Call Option Explained
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An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset a stock or index at a specific price on or before a certain date listed options are all for shares of the particular underlying asset. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
For most casual investors, that definition may as well be written in ancient Greek. There are only two kinds of options: Then you can either keep the shares which you obtained understanding put and call options a bargain price or sell them for a profit. But what happens if the price of the stock goes down, rather than up? You let the call option expire and your loss is limited to the cost of the premium. When understanding put and call options hold put options, you want the stock price to drop below the strike price.
If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price. Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value. Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively. But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree.
Remember, when a call is exercised, stock must be delivered by the seller of the call. If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous. As indicated, many option strategies involve great complexity and risk.
For this reason, not all options strategies will be suitable for all investors. In fact, with the exception of understanding put and call options, high net worth individuals who can afford and are willing to incur substantial losses, the writing understanding put and call options puts or uncovered calls would be unsuitable for just about everyone. Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do not understand the risks.
If you have lost assets because your stockbroker was engaging in options trading, please contact us today. Put Options and Call Options Perhaps we can explain options a bit more clearly.