All you want to know but never asked about the stocks and options markets.

jueves, 28 de agosto de 2014

What is an option?

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An option is a contract between two parties whereby one party acquires the right but not the obligation, to buy or sell a specified amount of an asset to the counterparty at a set price and at a future time. There are two basic types of options: 

  • Call option contract
  • Put option contract
There are four basic strategies when buying and selling options, which are:

Buying a call option (long call)

This strategy gives the buyer the right to buy the underlying asset at the strike price on or before the expiration date of the option. This right is granted by the payment of a premium. The maximum loss is limited to the premium and it has an unlimited potential profit.


Buying a put option (long put)

This strategy gives the buyer the right to sell the underlying asset at the strike price on or before the expiration date of the option. This right is granted by the payment of a premium. The maximum loss is limited to the premium and it has an unlimited potential profit.


Sale of a call option (short call)

This transaction is also known as writing a call option. It obligates the seller or writer to sell the underlying asset at the strike price on or before the due date, in exchange for payment of a premium. This strategy has limited profit (the premium) and a unlimited loss potential.

Sale of a put option (short put)

This transaction is also known as writing a put option. It obligates the seller or writer tobuy the underlying asset at the strike price on or before the due date, in exchange for payment of a premium. This strategy has limited profit (the premium) and a unlimited loss potential.


Option premium 

The premium is the price that the option buyer pays the seller of the contract (writer) to acquire the right to buy (call option) or sell (put option) the underlying asset in the future at the strike price. 

The option buyer pays the premium and the seller collects the premium, due to the difference of obligations and rights. The buyer has the right but not the obligation, to buy or sell, and the seller is obligated to buy or sell at fixed price, whether or not beneficial to him.


Call option Sell option
Option buyer Right to buy Right to sell
Option seller Obligation to sell Obligation to buy



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