Options Trading - Calls and Puts
By [http://ezinearticles.com/?expert=Mike_Doering]Mike Doering
Article Source: [http://EzineArticles.com/?Options-Trading---Calls-and-Puts&id=3634800] Options Trading - Calls and Puts
By [http://ezinearticles.com/?expert=Mike_Doering]Mike Doering
Like most disciplines, options trading has some lingo peculiar to the world of the options market. Most stock traders have heard of 'calls' and 'puts', but explaining how they work is another matter. Calls and puts are two types of options; there are call options and there are put options.
All options are defined by the following characteristics:
they pertain to a specific underlying stock
they have an expiration date
they have an exercise price (a.k.a. a strike price)
To help grasp these concepts of calls and puts, it's important to understand that owning calls or puts gives the owner certain rights. Now, if rights are one side of a coin, then obligations are the other side.
When a trader buys an option they are buying a right to either buy a particular stock or sell a particular stock. If one trader holds a certain right, then some other trader must have the complementary obligation. The obligation is the other side of the coin. It's the option sellers who have the obligations. So, option buyers have rights and option sellers have obligations.
Consider the analogy of home insurance. When you buy home insurance, you buy certain rights while the insurance company accepts complementary obligations. Once the two parties enter into this contract, The policy holder controls if and when the policy is exercised. Even if your home suffers some insured damage, you can choose not to make a claim against the policy.
An option trader can buy call options or put options. Once a trader owns a call option, they have the right to exercise that option during its lifetime at the specified price. This means the trader can buy the underlying stock at the specified price prior to the option expiring. If a trader owns a put option, they have the right to exercise that option prior to expiration. This means the trader can sell the underlying stock at the specified price prior to the option expiring.
Managing risk is crucial to any business including the business of trading stocks. Go here to learn more about options trading as a business. http://optionstradingbusiness.com
All options are defined by the following characteristics:
they pertain to a specific underlying stock
they have an expiration date
they have an exercise price (a.k.a. a strike price)
To help grasp these concepts of calls and puts, it's important to understand that owning calls or puts gives the owner certain rights. Now, if rights are one side of a coin, then obligations are the other side.
When a trader buys an option they are buying a right to either buy a particular stock or sell a particular stock. If one trader holds a certain right, then some other trader must have the complementary obligation. The obligation is the other side of the coin. It's the option sellers who have the obligations. So, option buyers have rights and option sellers have obligations.
Consider the analogy of home insurance. When you buy home insurance, you buy certain rights while the insurance company accepts complementary obligations. Once the two parties enter into this contract, The policy holder controls if and when the policy is exercised. Even if your home suffers some insured damage, you can choose not to make a claim against the policy.
An option trader can buy call options or put options. Once a trader owns a call option, they have the right to exercise that option during its lifetime at the specified price. This means the trader can buy the underlying stock at the specified price prior to the option expiring. If a trader owns a put option, they have the right to exercise that option prior to expiration. This means the trader can sell the underlying stock at the specified price prior to the option expiring.
Managing risk is crucial to any business including the business of trading stocks. Go here to learn more about options trading as a business. http://optionstradingbusiness.com
Article Source: [http://EzineArticles.com/?Options-Trading---Calls-and-Puts&id=3634800] Options Trading - Calls and Puts
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