In the investor world is regularly talked about call and put options. Especially novice investors are not well aware of the significance of these Investment Terms. In this article we focus on these investment instruments, which in some cases can be highly profitable.
Call Options And Put Options
An option is the right (but not the obligation ) to buy or sell at a price that is fixed in advance. An underlying asset such as a share of options have a certain maturity. For a call option, you have the option to purchase one share and a put option is the right to sell a stock.
So options have different opportunities for investors :
- Sale of a call option : higher returns than equities possible
- Buy a put option : speculating on a drop of a share
- Buy a put option to protect portfolio against price declines
For the more experienced trader options offer the ability to use specific strategies.
Options are listed separately on the various investment websites. An example is AGN C DEC 2012 14.00 euro with a premium of 4.60. This data can be read as follows : AEGON share with a term (validity ) until December 2012, and an exercise price of 14.00 euros . This “right” you can buy by paying 4.60 euro. Stock options are always based on one hundred shares. Is that why you pay 460 euros for a contract. Equity and index options expire on the third Friday of the month.
You buy a call option if you expect a rise in the underlying asset and a put option when you suspect that the price will fall. Volatility is an important factor in the options game. A risk factor for the buyer (holder) of options is that the underlying asset (eg a share ) is moving so hard.
Shares or options
Depending on your attitude to risk and the expectations about the future price movement of shares or options you choose either one of them. When you expect a very slight increase or even a stable value, chose the shares. Do you think the price will rise, the call option can be very interesting.
Exercising or selling
If the share in call options exceeds the agreed price ( strike price ), then you can buy the share. This is also called exercise of an option . This exercise is not mandatory and may even be unwise. There are in practice very few real options exercised. Most contracts are again sold at the stock market. In two cases, it is indeed interesting to exercise options ;
- The day the option expires ( expiry day )
- The day before a stock goes ex-dividend: If a stock dividend available to its shareholders , the share price decreases and thus the value of this option . To exercise the options for this so-called ex- dividend date will prevent this loss .
If you trade options, you owe transaction costs that can vary greatly between internet brokers. For this reason, it is also wise to compare prices before you go into business with a broker. Binary options are a new of trading options and are becoming more common among traders. To learn more about the advantages of trading binary options compared with common stock options, please read our special page about binary options or take our free course, the link is on the top of this page under ‘Free Stuff’.