Buy Call Option Example – What’s The Difference Between A Call Option And A Put Option?

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

Buy Call Option Example

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

If you have dabbled in the investing world for any period of time, you have undoubtedly heard claims about people making money from stock options. However, stock options are quite different than the stock which underlies them. With a stock, there are two basic options: buy it or sell it. With options, there are contracts at many different strike prices and expiration dates. At any given time, there may be hundreds of options for each individual stock. This article will help you understand the two basic types of options: Calls and Puts.

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

1. What is a Call?

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

A call option is a contract. There are two sides to this contract, and you can enter the contract on either side that you wish. The buyer of a call has the option to buy a stock if it reaches a previously agreed upon price. The seller of the call has the obligation to sell the stock if it reaches the agreed upon price.

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

Example:

Buy Call Option Example - What's The Difference Between A Call Option And A Put Option?

Stock trades at $ 100

The price of the call option is $ 5

The Strike Price is $ 100

The expiration date is January 21, 2011.

A buyer and a seller of the option enter into a contract with each other. Typically, the contract is settled on the day after the option expires. Basically, one of two things can happen. Either the stock will be above $ 100 dollars, or it will be below $ 100 dollars. If the stock is below $ 100, then the option buyer won’t want to buy the stock for that price, since he can simply buy it cheaper directly from the market. In that case, the option seller keeps the $ 5 he sold the option for. Buy Call Option Example

If the stock closes above $ 100, then typically the option holder will buy the stock for that price. He can then either choose to hold the stock or sell it on the open market. In this case, the option seller still gets to keep the $ 5 premium he was paid for his end of the contract.

In this example, the option buyer would need the stock to rise to $ 105 in order to see a profit. Since he paid $ 5 for the opportunity to buy the stock, he would need to make more than that on the trade in order to show a profit. If the stock closes at $ 110, then he would show a profit of $ 110 – $ 100 – $ 5 = $ 5 per share. Since he only invested $ 5 to begin with, this represents a 100% gain in a short period of time.

For this reason, options can provide investors with dramatic gains if the stock price rises quickly in a short period of time. On the other hand, if the stock had closed at $ 100 or less, he would have lost all his money on this trade.

2. What is a Put?

A put option is similar to a call contract, except that the roles are reversed. With a put, it is the buyer of the put who has the option to sell, and the seller of the put who has the obligation to buy.

Let’s run through the same example, this time with a put.

Stock trades at $ 100

The Price of the Put option is $ 5

The Strike Price is $ 100

The expiration date is January 21, 2011.

The primary reason that someone may want to buy a put is to insure his stock. If an investor owns the stock in question, he might be worried that the stock might drop sharply if the company reports a bad quarter. So he might buy a put at a strike price of $ 100, which would guarantee him the ability to sell his stock for $ 100 on January 21, 2001, even if it has dropped down to $ 50. If it closes above $ 100, then again, the option expires as worthless and the put seller pockets the $ 5. In this case, the put seller acts as the insurer of the stock, and the put buyer is buying insurance for his stock, just as someone might buy insurance on their home for a small fee. Buy Call Option Example

Always dream of being Rich? Never able to make a Consistent Profit through trading?
Get your Buy Call Option Example and be Successful forever!
Try this Buy Call Option Example and be Financial Free in 6 Months!

Buyfave.com