The option is being a common form of the derivative. The option is a form of contract or provision you can say or may even a contract that is giving one of the parties right not the obligation to perform some task with another party which is the option writer or issuer. The put and call options are basically types of the ladder option. There are different types of the ladder types depending on the ladder trading. This all is happening in accordance to the specified terms and conditions. In the ladder trading these options can also be embedded in numerous kinds of contracts. For instance, some corporation may be issuing a bond with some options that are allowing the company to buy the bonds in a period of almost 10 years and the price is already set. This is also known as the standalone options trade over exchanges in the ladder trading. These are also linked with a number of assets which are underlying. Abundant of the exchange-traded options are having stocks which are either commodities underlying, however the standalone options trade are having a huge variety of assets underlying in the form of currencies, swaps, bonds, or commodities etc.
Major Types of Options
There are two major types of options. These two types are puts and calls.
The call option is providing the holder a right however not obligation of purchasing the assets which are underlying at the specific price known as the strike price for a mentioned interval of time. If the stock is failing to maintain or meet the strike price which is used before the date of expiry, the option is then expired and it becomes of no worth anymore. The investors are buying the option when they are thinking of the share price underlying that the security will have risen or sell a call in case if they are not thinking of it to fall. While selling an option is also known as the writing of an option.
The options is giving the holder a right to sell the assets underlying at a specific price known as the strike price. The writer or the seller of the put option is obligated for buying the stock at strike price. The put options are being exercised during any interval before its expiry and the investors are buying the puts if they are thinking that the share prices of the stocks would fall or write or sell the put options if they are thinking that the shares will rise. The buyers of puts are those who are holding put either speculative buyers thinking of the leverage who are desiring protect the long positions in the markets in order to move upwards. The worst situation for the put seller is that the market is moving downwards. This is the time when the maximum profit is limited to put premium received and is only achieved when the price of the underlying asset is at the position above the strike price at its expiry. The loss is unlimited for the seller of puts option.
The Motivation of Call and Put Options
The basic motivation behind puts and calls option is to get benefit being the seller or buyer. Those who have a desire to buy the call option are having a desire of underlying asset to increase to a value in future where they can sell the option at a maximum price. The sellers or writers of the puts call option my suspect that this is not going to happen or might be willing for giving up some of the profit in order to exchange for some immediate return or premium and its opportunity is making the profit through incorporating the strike price. The calls and puts option is either giving you loss or option depending on the worth of strike price. The buyers of the put options are believing that the price of the assets underlying are going to fall by the time or hope for protecting the asset for a long time on the asset. Instead of shorting he asset there are numerous options to buy puts and calls options as the it will risk the premiums only. The seller of the put options is not believing that the price of the underlying asset may have a fall but the seller is selling the put option for collecting premiums.
Option Chains and Expiry
There are basically two main types of the expiration of the calls and puts options. However, the European style of the options can never be practiced until and unless the expiration date while the American style can be practiced any time. The price for both the calls and puts options are being listed on the chain sheet which is showing the prices, interests, and volumes of each of the strike prices and the expiration dates.
The Strike Prices
The strike price for each date is changing for the call vs put options. For every expiry date the option chain is listing numerous of the options with different prices. The prices are differing because of the different strike prices which is the price at which the assets underlying may be sold or bought. In case of the call options the lower is the stock price, the higher are the costs. This is the difference among call vs put options that in the put option higher stock price is costing more.
The Profit Rates
There is a difference in the profit rates of call vs put options. With the call options the buyers are hoping to have profits by buying the stocks for a very less rising value. The sellers are hoping to profits through the stock prices which are declining and rising less than the fee to be paid by the buyer of the option. In suchsituations the buyers are not exercising the right for buying while the sellers are keeping the paid premiums. With having the puts option, the buyers are hoping that the put option will be expiring with the stock prices which are above the strike price and the stock is not changing hands while they will get profit from the premium being paid for the put option. The sellers are getting profit only if the stock price is falling below the strike price.
- What are advantages of the option trading?
There are numerous advantages. You don’t need to invest abundant money. You are able to achieve abundant returns by making correct decisions at correct time. The risk of buying or selling options is manageable.
- What strategies can you use in the buying or selling of options?
You can use condor, strangle, or vertical spread strategies.
- What is the American and European Style?
The American style is the one which is exercised by seller or buyer anytime until the expiry date approaches. Whereas the European style is only practiced when the expiry date is approaching not before the expiry date.