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Put options allow you to sell shares at the strike price. The effect of an increase in the price of the stock on a stock option depends on the type of option and on where the stock price is in option price depends to the strike price.
Out of the Money Calls Suppose you purchase a call option and the market price of the underlying stock is less than the strike price. This remains true as long as the stock price stays below the strike price.
The only value the call option has is a premium the option contract seller, called the writer, charges to cover her costs. In-the-Money Puts Put options work in reverse to call options.
A put option is in the money when the market price is less than the strike price. This is because you can buy the shares on the market and sell them to the option writer, who has to pay you the higher strike price.
What Is the Value of a Call or Put Option?
In other words, when the stock price goes up, the price of a put option goes down. This means that, other than the premium, the option has no value and the price is close to nothing.
The reason is simple: you would have to pay more for the shares than the strike price you would get by exercising the option to sell the shares. Consequently, once the stock price rises to the strike price of a put option, the price of the option reaches zero and stays there unless the stock price drops below the strike price.
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Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in Read More:.