Options are put
- Jan 9, PM EST TheStreet When the market is volatile, as it has been recently, investors may need to re-evaluate their strategies when picking investments.
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What is an Option? An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
For most casual investors, that definition may as well be written in ancient Greek. Put Options and Call Options Perhaps we can explain options a bit more clearly. Then you can either keep the shares which you obtained at a bargain price or sell them for a profit. But what happens if the price of the stock goes down, rather than up?
A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike pricebefore a certain expiration date. If the option is exercisedthe writer of the option contract is obligated to purchase the shares from the option holder. Key Takeaways A put option is a contract that gives its holder the right to sell a number of equity shares at the strike price, before the option's expiry. If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price. Instead of exercising an option that's profitable, an investor can sell the option contract back to the market and pocket the gain.
You let the call option expire and your loss is limited to the cost of the premium. Options are put you hold put options, you want the stock price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price.
Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value. Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively.
Buyer of option pays you amount through brokers and the exchange Helps reduce you loss or increase profit.
But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree. Remember, when a call is exercised, stock must be delivered by the seller of options are put call.
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- This pre-determined price that buyer of the put option can sell at is called the strike price.
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If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous. As indicated, many option strategies involve great complexity and risk.
For this reason, not all options strategies will be suitable for all investors. In fact, with the exception of sophisticated, high net worth individuals who can afford and are willing to incur substantial losses, the writing of puts or uncovered calls would be unsuitable for just about everyone. Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do not understand the risks.
If you have lost assets because your stockbroker was engaging in options trading, please contact us today. Have Questions?
But you don't have the stomach to short the stock because there's a possibility that you could lose an infinite amount of money if you short it. You still have an option. Quite literally, you still have an option.