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Puts and Calls
- Trading Options
The
possibility of puts and calls adds choice and flexibility for the
investor. As applied to option
contracts these are the two main types in widespread use.
For buying a call (see call options)
investors obiously want to capitalize on the rise in price for
profit, but also, hedge against potential dramatic losses. One
advantage for the purchaser of the call is that if the price
drops, he or she may chose to not buy the underlying asset, and
sacrifice only the cost of the option and not take the 'full
loss'. So, buyers of the call option are generally betting on
a rise in the price.
Contrary to the call option, with the the put (see put
options) the buyer is looking to profit from a drop in the
underlying asset. Although, if the price does increase, the put
option buyer may sacrifice the cost of the option only (same
for the call)
While put and call options are issued for a minumum of 21 days, they occur in periods of one, two, three and six months.
For option traders there is no obligation to buy or sell the underlying assets - it is their alternative whether or not to buy or sell the underlying shares - to exercise the option. It is also their alternative to sell the options themselves.
The buyer of options begins with a net debit - named this, since money has been spent and a profit must be realized to in order to recoup the amount of the spend.
The seller of options on the other hand begins with a net credit - taken to be the premium - which is retained by the seller either way in the event the option is or is not exercised.
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