What are Call and Put Options?
Call and Put Options! An option can be defined as one of the most common derivative in terms of stock market trading. It is either a contract or the condition of a contract which will give one party the authority to conduct a specific transaction/trade with a different part, as per a set of pre-decided terms. In this regard, one should that although the option will give the right for conducting the transaction, it will not give any obligation with regard to this matter. An existing option can be used in several types of contracts. In the following section, you will get a detailed insight on Call and Put Options.
Options trade is primarily concerned with call and put options. Call options gives the concerned party the right of purchasing an underlying asset at a specific price (widely known as the strike price) for a specific time period. If the stocks do not meet the given strike price before the date of expiration, the option will expire and no longer happen to be useful. The investor will usually buy a call when they feel that price of the share of any underlying asset/security will happen to rise. Likewise, they are going to sell the call if they feel that it is going to fall. Getting an option sold is also known as writing an option.
Like the call option, the put option too will give the party the right to sell any underlying asset at a particular price (the strike price). Here, the trader selling the put option will be obligated to purchase the concerned stocks at the strike price itself. The put option can be used at any point of time before the option is going to expire. An investor purchases the put option if they feel that the share price of a specific stock is going to fall. At the same time, they sell their options if they think that the prices of share are likely to rise.
Buy Call Options
In order to buy a call option, you will first have to identify the stock which you think will be increasing in terms of price. After identifying the stock correctly, you will have to review the option chain of the stock. Now, choose the month of expiration and the strike price. Finally, purchase the stock only after you have determined that the market price of that specific call option is reasonable enough. In this regard, if you are confident that a specific stock is going to rise up a few levels before the corresponding expiration date of the option, it would be one of the most profitable ventures (albeit with little risk) to purchase a call option that has a strike price slightly higher than its existing stock price.
Buy Put Options
When it comes to put options, one of the best ways to maximize your profit would be by buying at the lows and selling at the highs. The put option will help you with the right strategies which again will let you fix the right selling price. This will mean that you expect a potential decline in the rates of the underlying assets. Due to this reason, it would rather be a good idea to pay a small premium to protect yourself. This will avoid any impending loss.
Sell or Short Call Options
A short call simply refers to the sale of a specific call option, which again is a contract that will give the concerned holder the right (and yet not any obligation) for buying any stock, commodity, currency or bond at a specific price. If the investor feels that the price of their asset is going to fall, he can always sell short that underlying asset along with the following call option. When you own the call option you protect yourself against any hike in the prices of underlying securities. At the same time, when you sell the call you end up generating cash while also developing relatively limited risks.
Sell or Short Put Options
A short put is the kind of strategy which is concerned with the sale of an existing put option. The option itself happens to be a security in its existing rights as it can be both bought and sold. If the holder of an existing put option feel that the rates of any underlying asset is going to rise before the expiration date of the contract, the holder of the option might either by the underlying stocks or sell short the put options.