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 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.
The 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 a $50 strike price. The price is the same as the current price at $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.)
Options are exercised on specific stocks. It contains the details of the stock: the name, the strike price, the expiration date, and the premium.
When the option cannot be exercised after the expiration, it is considered worthless. (Per tradition, expirations usually end on the 3rd Friday of the month.)
This is the option to sell a stock. The option-holder has the right, but not the obligation, to sell a particular stock within a certain time period for a certain price.
Here, the buyer expects the fall of the stock prices but h refuses an outright sale in case the price goes up again. The seller here accepts the stocks at a low price because he feels the price is stable.
These stock options are used to protect against losses and can be used as investment opportunities as well. They are commonly used in combinations in the purchase of stocks.
In a bull market, stocks and call options can be bought and put options are sold. In a bull market, investors are allowed to take full advantage of rising prices.
Stocks and call options can be bought and put options can be sold in a bull market. In a bull market, an investor is allowed to take full advantage of the rising stock prices.
During a bear market, investors can sell stocks, sell calls, and buy put options to limit their losses and generate profits. In an unstable stock market, a mixture of puts and calls are used to maximize profit potentials for all.