The Other Most Common Stock Option Is The PUT

Category: Finance.

Call and What?

The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. An option is a" legal financial contract" . This is to be done at a price that has been predetermined which is called a strike price. There are just two basic types of stock options, the European and the American. It is also to be accomplished on or before a specific date. An American stock option is a contract that can be exercised between the purchase date and the expiration date.

Strike price. Each stock option is designated by the following: Name of the stock. Expiration date. Two of the most popular types of stock options are Calls and Puts. The premium that was paid for the option plus the broker s commission. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. The other most common stock option is the PUT.

If an option expires, it is useless and worthless. This is almost the exact opposite of a Call. How in the world do people trade these stock options? If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option. Stock options traders will rarely exercise their option and purchase( or sell) the underlying security. This saves on commissions. Instead, they will buy back or sell the option.

Options officially expire on Saturday following the third Friday of the month in which the option expires. The option has to be traded by Friday in order to settle on Saturday. Shares of stock have a 3- day settlement interval but option settle the very next day. Another thing you may hear about with regards to stock options is volume and open interest. The open interest figure is the number of contracts that are outstanding at any given time. Volume is the number of contracts that are traded on any given day. For those who are curious, a Put- Call theorem has been formulated which defines the following relationship for the price of puts and calls: P= C- S+ E+ D.

C= the price of the call. P= the price of the put. S= the stock price. D= the present value of the dividends. E= the present value of the exercise price. An ordinary investor will see a violation of the put- call parity from time to time. If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.

This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired. There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.