Call options (or "calls") give you the right, but not the obligation, to buy or sell underlying assets (security, stock) at a specific price (strike price) for a fixed period of time (before an expiration date).Traders may buy call options when they believe an underlying security will rise in price and buy puts when they expect the underlying security to drop in price.At the same time, traders may sell calls (covered or uncovered) short when they believe an underlying security price will go down and sell short puts (uncovered options only) when they expect the underlying security price will go up.The options buyer may exercise the right to buy/sell underlying assets at a strike price any time before or at the expiration date (American style options). In case of the European style options it could be done on a predetermined expiration date only. On an options exchange, every 3rd Friday of the month is the expiration day - this means that this month expiration options expire on this day. If the price of the underlying stock at expiry date is higher than the strike price then the call options buyer profits while call options seller experiences losses due to the obligation to sell stock at strike price. Opposite with put options: if the price of the underlying stock at expiry date is lower then the strike price then the put options buyer profits while put options seller experiences losses due to the obligation to buy stock at strike price.The risk of buying an option is limited to 100% of premium paid for the option plus commissions. It happens when the option expires worthless. The risk of selling an option short is unlimited.An options seller, also called the "writer", takes on the obligation of buying/selling an underlying security (stock) from the options buyer at strike price, up until a specified expiration date. Call sellers make money by collecting premiums for sold options. If an option expires worthless, the call writer keeps the premium.Options Trading Examples:An example using call options:Let's assume a particular stock (for instance QQQQ) is traded at the current moment at $30 and a trader buys call options at a strike price of $30. If in some time this stock has raised to $40, and the trader may exercise the call option - the call seller must sell stock for $30 which could be sold for $40 in the stock market. In this case the call buyer makes profit while call seller experience losses.At the same time, if the stock drops down to $25, the call will expire worthless and in this case, the trader loses the premium paid for the option (100% losses) while the call options seller keeps this premium (100% profit).An example using put options:The same as in the example above, let's assume the a particular stock is traded at the current moment at $30, however, now a trader buys put options at a strike price of $30. If in some time this stock has drops to $20, and the trader may exercise the put option - the put seller must buy stock for $30 which could be bought for $20 in the stock market. In this case the put buyer makes profit while put seller experience losses.At the same time, if the stock rises down to $31, the puts will expire worthless and in this case, the trader loses the premium paid for the option while the options seller keeps this premium.
Please Rate this Article 5 out of 54 out of 53 out of 52 out of 51 out of 5
Not yet Rated
