What Is Call & Put in Stock Market?
Puts and calls are purchased options that give the buyer the right but not the obligation to buy or sell securities (stocks, funds, commodities, foreign currencies) on or before a pre-determined date in the future at a pre-determined price. The option is a contract between a specific buyer and seller and allows the buyer to make money no matter whether the market is going up or down.
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What are Options?
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Put and call options are derivatives. In other words, their values are determined by the worth of the underlying security. Most often, the underlying security is a publicly traded stock. Options contracts are traded on securities exchanges and are written for a specific number of shares or units of trade. Fractions of a contract cannot be purchased.
When Do Options Contracts Expire?
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An option contract can have one of four expiration dates depending on the month and year selected. The expiration day is always the Saturday after the third Friday of the expiration month and year. The option buyer must exercise (buy or sell) the option or buy or sell the underlying security before the expiration date or lose his entire investment, the purchase price of the options contract.
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What is a Call Option?
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A call gives the buyer the right to purchase a specific security from the seller of the call at a predetermined price (the strike price) on or before a specified date. The buyer is betting that the price of the underlying security will increase above the strike price. If the price increases, the buyer makes money either by purchasing the stock from the seller for the strike price and selling it at the higher price or by selling the option at a profit to another buyer.
What is a Put Option?
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A put gives the buyer the right to sell a specific security to the seller of the put at a predetermined price (the strike price) on or before a specified date. The buyer is betting that the price of the underlying security will decrease below the strike price. If the price decreases, the buyer makes money either by selling the stock to the seller at the strike price or by selling the option at a profit to another buyer.
What Happens If the Buyer Loses the Price Bet?
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If the buyer purchases a call option and the price of the stock does not rise above the strike price, the buyer loses the purchase price of the contract unless he sold the option before it expired.
If the buyer purchases a put option and the price of the stock does not fall below the strike price, the buyer loses the purchase price of the option unless he sold the option before it expired.
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References
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