Stock Options Blog

Calls and Puts

CALL OPTIONS

Call
A call is a contractual right to buy 100 shares of a specified stock at a fixed price per share, any time between purchase of the call and the specified deadline in the future.

Call Buyer
The buyer of a call hopes the stock will rise in value, because that will cause the call to rise in value as well. As a result, it can be sold for more money than the original purchase price.
Loss is limited to the premium paid. Profit potential is unlimited.

The call buyer acquires the right from the call seller to purchase 100 shares of the underlying stock at the striking price by paying the seller a premium for the contract.

Such a person would place a “Buy Calls to Open” order with their broker to open a new long call position, and a “Sell Calls to Close” order to close the existing long call position.

Call Seller (Writer)
The seller of a call hopes the stock will fall in value, because that will cause the call to fall in value as well. As a result, it can be bought back for less money than the original sale price.
Loss is unlimited in the case of selling uncovered calls. Profit is limited to the premium.

The call seller grants the call buyer the right to purchase 100 shares of the underlying stock at the striking price by charging the buyer a premium for the contract.

Such a person would place a “Sell Calls to Open” order with their broker to open a new short call position, and a “Buy Calls to Close” order to cover the existing short call position.


PUT OPTION

Put
A put is the opposite of a call. It is a contractual right to sell 100 shares of a stock at a fixed price per share and by a specified expiration date in the future.

Put Buyer
The buyer of a put hopes the stock will fall in value, because that will cause the put to rise in value. As a result, it can be sold for more than it was purchased for.
Loss is limited to the premium paid. Profit is limited to the stock falling to zero.

The put buyer acquires the right from the put seller to sell 100 shares of the underlying stock at the striking price by paying the seller a premium for the contract.

Such a person would place a “Buy Puts to Open” order with their broker to open a new long put position, and a “Sell Puts to Close” order to close the existing long put position.

Put Seller (Writer)
The seller of a put hopes the stock will rise in value, because that will cause the put to fall in value. As a result it can be bought back for less money than the original sale price.
Loss is limited to the stock falling to zero. Profit it limited to the premium received.

The put seller grants the put buyer to sell 100 shares of the underlying stock at the striking price by charging the buyer a premium for the contract.

Such a person would place a “Sell Puts to Open” order with their broker to open a new short put position, and a “Buy Puts to Close” order to cover the existing short position.

posted by Raphael Blogger @ 12:51 PM