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Options: Different Types of options
There are two types of options which are called
calls and puts and with both types of option, you can either choose to buy or
sell. People who buy options are called holders and those who sell
options are called writers.
Call options - A call gives the holder the right to
buy an asset at a certain price within a specific period of time. Calls
are similar to having a
long position on a stock.
- Buy calls - Buying a call option
gives you the right to buy a fixed quantity of the underlying investment at a
specified price, called the exercise or strike price, within a
specified time period. For example, you might buy a call option on 100 shares
of a stock if you expect the market price to increase but prefer not to tie up
your money by making the actual purchase. If the price of the stock goes up,
you can exercise the option and buy at less than the market price. But if the
price doesn't change or it drops, you can simply let the option expire. Buyers
of call options are expecting the stock rise (bullish). The more it rises,
more profit they make.
Sell calls - If you are buying a call, someone has to take the
other side of selling the call.
In contrast, when you can sell a call option,
which is known as writing a call. That gives the buyer the right to buy the
underlying investment from you at the strike price before the option expires.
If you write a call, you are obligated to sell if the option is exercised.
When you sell calls you are hoping that the option expire worthless (most do),
so you can receive the premium option buyer paid.
Put options - A put gives
the holder the right to sell an asset at a certain price within a
specific period of time. Puts are very similar to having a
short position on a stock.
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Buy puts - Buying a put option gives
you the right to sell the specific financial instrument underlying the
option at a specific price called the exercise or strike price to the
writer, or seller, of the option before the option expires. You pay the
seller a premium for the option, and if you exercise your right to sell, the
seller must buy. Buyer of put options are expecting the stock to fall
(bearish). The more it falls, the more profit for them
- Sell puts - Selling a put option
means you collect a premium at the time of sale. But you are obligated to
buy the option's underlying instrument if the option buyer exercises the
option. Just like the sellers of the call options, sellers of the put option
is hoping that the option expire worthless, so they can keep the premium
they've collected.
To Open or Close
Open - An opening transaction
is one that adds to, or creates a new trading position. It can be either
a purchase or a sale. With respect to an option transaction, consider
both:
- Opening purchase -- a transaction in which
the purchaser's intention is to create or increase a long position in a given
series of options.
- Opening sale -- a transaction in which the
seller's intention is to create or increase a short position in a given
series of options.
Close -
- Closing purchase -- a transaction in which
the purchaser's intention is to reduce or eliminate a short position in a
given series of options. This transaction is frequently referred to as
"covering" a short position.
- Closing sale -- a transaction in which the
seller's intention is to reduce or eliminate a long position in a given
series of options.
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Option Language
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