An option is the right, but not the obligation, to buy or sell a stock (or other security) for a specified price on or before a specific date. A call is the right to buy the stock, while a put is the right to sell the stock. The investing person who purchases an option, whether it is a put or a call, is the option "buyer." Conversely, the person who originally sells the put or call is the option "seller."
Options are contracts, which include standardized contract terms and give investing party the right, but not the obligation, to trade a stock at a fixed price (strike price) for a specific duration of time. As agreed upon through accepting the contract terms, all options have an “expiration date”. This can be as much as nine months from the date the options are issued. Typically, a stock option can be exercised at any time between the date of purchase and expiration date. To the investing buyer, a stock “call” option signifies the right to buy 100 shares of a certain stock, whereas the “put” option typically implies the right to sell 100 shares of a certain stock. It is the option seller’s responsibility to act in accordance with the terms of the options contract-selling the stock at the contracted price (the strike price) for a call seller, or purchasing it for a put seller-if the option is exercised by the buyer. The primary market for trading of option contracts, and the place where the stock options are issued, guaranteed and cleared is the Options Clearing Corporation (OCC). OCC is a registered clearing corporation with the SEC.
As with stocks, investing in options can be used to take a position on the market in an effort to capitalize on an upward or downward market move. Unlike stocks, however, options are capable of giving an investor the benefits of leverage over a position in an individual stock or basket of stocks reflecting the broad market. In addition, options buyers also can take advantage of predetermined, limited risk. On the other hand, options investors assume significant risk if they do not hedge their positions.
The price of an option is called its "premium." The potential loss to the buyer investing in options can be no greater than the initial premium paid for the contract, regardless of the performance of the underlying stock. This allows an investor to control the amount of risk assumed. On the other hand, the seller of the option, in return for the premium received from the buyer, assumes the risk of being assigned if the contract is exercised.
If you can forecast a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity, is called stock option. The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish). If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value. Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential. Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect with limited risk.
