|
There are two main kinds of stock options—the “call,” which is an option to buy, and the “put,” which is an option to sell. Let’s take a look at how these work, starting with calls. Wouldn’t it be great to be able to buy a stock after first seeing if it goes up or down? A call option allows you to do that. Say a stock is selling at $80 a share today. With a call, a certain price is specified, which doesn’t have to be where it is today, and you have the option after a certain time period—say thirty days—to buy the stock, or not, at that price. So the deal might be that you get to buy one hundred shares at $85 after thirty days if you choose, and you certainly would choose If the price happens to go up to more than that in the interim. if that stock that was at $80 is now at $100, you would exercise your option to buy those shares at $85. if the stock is now at $60, you would decline to exercise your option to buy those shares at $85. So if you can’t lose, if you only have to complete the deal when it’s profitable and can skip it otherwise, what's the catch? Well, just that you have to pay for the option. You’re not really walking away without having lost if you don’t exercise the option, because you paid to have that option in the first place. What you pay will depend in part on the specified price (the “strike” price). in the above example, $85 was used as the strike price for the stock currently selling at $80. imagine instead that the deal was for an option to buy at $70. Obviously that would cost much more, because there is so much higher a probability that exercising that option in a month will be advantageous (i. e., that the stock price will be above $70 ). On the other hand, if the deal was for an option to buy at $125, that would likely cost virtually nothing, because there's so little chance it will be advantageous in a month to exercise the option to buy at that price. visit: Indian Stock Tips Free
Related Articles -
Stock, Stocks, Shares,
|
