essentials1


Options Basics Explained

 

What is a call option?

A call option gives you the right to buy or the obligation to sell stock at an agreed upon price (strike) within an agreed upon period of time (expiration).

 

What is a put option?

A put option gives you the right to sell or the obligation to buy stock at an agreed upon price (strike) within an agreed upon period of time (expiration).

 

Pay attention to the underlined rights and obligations above. This is where most new options traders get confused and ultimately quit. Once you understand your rights and obligations everything else becomes easier.

 

Let’s break the above two statements out into their respective parts… you know… for the sake of understanding.

 

Call Options

There are two ways to trade a single call option contract. You are either the buyer (long) or the seller (short).

 

Call Option Buyers

– Have rights NOT obligations

– Call buyers have the right to buy stock at the specified price on or before the specified expiration date.

 

Call Option Sellers

– Have obligations NOT rights

– Call sellers have the obligation to sell stock at the specified price on or before the specified expiration date.

Moving along… Lets take a look at put options.

 

Put Options

Just like with call options a single put option contract can be traded two ways, you’re either the buyer (long) or the seller (short).

Put Option Buyers

– Have rights NOT obligations

– Put buyers have the right to sell stock at the specified price on or before the specified expiration date.

 

Put Option Sellers

– Have obligations NOT rights

– Put sellers have the obligation to buy stock at the specified price on or before the specified expiration date.

 

Simply, buyers will always have rights and sellers will always have obligations. I hope this explanation makes crystal clear your commitment when it comes to trading options. It isn’t complicated just takes some getting use to so feel free to browse this information any time if things get confusing.

 

Take a look at the figure below. Click to enlarge.

Apple Trade
Long and Short Call

 

In the options market there is a buyer to every seller and a seller to every buyer! In order for you to buy an option contract someone has to be willing to sell it to you. The same works the other way, if you wish to sell an option contract someone has to want to buy it from you.

 

Now… Let’s move on to the fun stuff.

 

Click below to continue…


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