Option Types: Calls & Puts

Watch video · Options come in two flavors—puts and calls. A call is the right to buy a stock for a given price within a given period of time, while a put is the right to sell a stock for a given price within.

See our naked call article to learn more about this strategy.

Put and Call Options: An Introduction

Option Types: Calls & Puts. In the special language of options, contracts fall into two categories - Calls and Puts. A Call represents the right of the holder to buy stock.

The seller of a Call option is obligated to sell the underlying security if the Call buyer exercises his or her option to buy on or before the option expiration date. A Put option is a contract that gives the buyer the right to sell shares of an underlying stock at a predetermined price for a preset time period. The seller of a Put option is obligated to buy the underlying security if the Put buyer exercises his or her option to sell on or before the option expiration date.

At any given time, an option can be bought or sold with multiple expiration dates. This is indicated by a date description. The expiration date is the last day an option exists. For listed stock options, this is traditionally the Saturday following the third Friday of the expiration month. Please note that this is the deadline by which brokerage firms must submit exercise notices. You should ask your firm to explain its exercise procedures including any deadline the firm may have for exercise instructions on the last trading day before expiration.

Certain options exist for and expire at the end of week, the end of a quarter or at other times. It is very important to understand when an option will expire, as the value of the option is directly related to its expiration. They can and often do simply opt to resell their options - or "trade out of their options positions". If they do choose to purchase or sell the underlying shares represented by their options, this is called exercising the option.

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Return on Equity 6. Fixed Income Investments The Tradeoff Theory of Leverage The Business Cycle The Industry Life Cycle Intramarket Sector Spreads Calls and Puts American Options and Moneyness Long and Short Call and Put Positions Covered Calls and Protective Puts. There are two main types of options: Call options provide the holder the right but not the obligation to purchase an underlying asset at a specified price the strike price , for a certain period of time.

If the stock fails to meet the strike price before the expiration date, the option expires and becomes worthless. Investors buy calls when they think the share price of the underlying security will rise or sell a call if they think it will fall.

Selling an option is also referred to as ''writing'' an option. Put options give the holder the right to sell an underlying asset at a specified price the strike price. The seller or writer of the put option is obligated to buy the stock at the strike price. Put options can be exercised at any time before the option expires.

Investors buy puts if they think the share price of the underlying stock will fall, or sell one if they think it will rise. Put buyers - those who hold a "long" - put are either speculative buyers looking for leverage or "insurance" buyers who want to protect their long positions in a stock for the period of time covered by the option.

Put sellers hold a "short" expecting the market to move upward or at least stay stable A worst-case scenario for a put seller is a downward market turn.

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