The simple examples so far have only been call options i. That is why these two types of option contracts Calls and Puts exist. In our previous example, Peter bought a call option from Sarah. Peter also could have bought a put option from Sarah. Buying put options enables investors to profit when the markets fall without having to sell short stock. Buyers of put options have unlimited profit potential if markets begin to sell off. Put option holders also have limited risk if the market goes against them i. To get a better understanding of the payoff of a put option, take a look at the following option strategy graphs:. Hi Manojg, The seller of the put option is short the option, not the stock. If the option is then exercised by the buyer the seller of the option now becomes the holder of the stock - or long stock. Call the exercise there is no position in the option. Not sure if that answers your question - let me know if it is still unclear. Let us say there is a put option. The buyer of the put option gets right to sell the stock and he holds short position. Similarly, the seller of the option i. So, he holds long position right? However in Hull's book says the seller holds short position. Now what is right? Yes, when you are long a put and you exercise you will sell the underlying asset at the strike price. If you don't hold the asset and short positions are allowed i. Otherwise your broker may borrow the stock on your behalf to sell to the buyer. Option if the option is American style. Options can either be American can exercise option to expiration date or European can only exercise on the expiration date. Typically stock options are American style but it is of course best to check the specifications before you trade. An easier way to think of it is that a call option increase in value with the market goes up and a put option increases in value when the market goes down. Hi, Peter, I just want to know if I properly understood the terms and principle of call and put options. So, the holder of the option can play with the put or call options. When call price is down, then the holder can oblige the buyer on the basis of the option contract to buy the stocks for a value specified in the above option contract? But the transaction can be closed only during the period of contractual time. But if the price goes up the holder has the right not to sell but it means that the holder will not earn anything if the option contract is expired? A put option gives the market the right to "sell" the stock if decided. So, when buying an option, the holder of a call option wants the market to rise and when holding a put option wants the market to fall. Sir, please clarify my doubt. Hi Charles, No, they are very different. Even though your bias is bullish, your payoff and put are almost opposite. First, buying a call gives you the power to decide put exercise the option or not - so your risk is limited to the premium that you paid for the position. If it is not profitable to exercise you just walk away and your only loss is the premium. However, when you sell an option that power sits with the buyer and you then have the risk of being exercised. You do receive the premium but your losses are not limited like they are when you buy an option. Second, if the market does rally your profit potential varies between a long call and short put: You can see the payoff graphs of the two in the below links; Buying a Call Option Selling a Put Option. Hi, Is short selling a put option equivalent to buying a call option, since in both situations you are bullish on the market directions. Hi Tony, Sort of - when you exercise you will need to sell the underlying. If you don't already own the underlying then you will have a short position in the option. Let's suppose I have not purchased the underlying. If I buy a Put option, and I decide to exercise it, then it means that I have to buy the unerlying at the market price and then sell it at the strike price? There isn't any better choice between the two types as they both have different characteristics. Retail traders may buy calls if they think the market will rise and buy puts if they think that the market will fall. Hi Achu, A double option is an option combination of a call and a put with an "or" condition. Hi Amarendra, A call option provides the buyer the right to buy an underlying asset such as a stock at fixed price and date in the future. For this right the buyer pays a price for the option called premium to the option seller. Hi Daniel, It depends where call are trading and what broker you use. Mr Peter, when do the exercise, who among call writer, put holder, put writer and call holder will pay for the exercise? Hi Ravi, A long position is where you have paid money market own "rights" to the asset - in the case of options, you have the right to exercise the option. A short position is where you have sold something that you don't actually own. When you short options you receive money upfront as a result of the transaction but the right to exercise sits with the buyer option of the option. I wonder whether what situation short sale is allowed? Hi Daniel, Option buyers holders pay the premium to the option sellers writers. So, sellers receive the money up front when the trade takes place. Hi Peter, could put please help me? I want to know who are can make put and receive payment among of call option writer, put option writer, call option holder and put option holder. The strike price is the price that you will have to buy or sell the underlying at if the option is exercised. Please see the page Why Trade Options. If the call option is out of the money at the expiration date then the strike price will be higher than the current market price - so you would be better buying the stock directly via the exchange. Hi Peter, I have a question here. If we buy a call option and upon expiry the option is out of money, can we buy the underlying stock at the strike price IN INDIA? If yes, how much quantity we need to buy Is it the lot size or for the money which we invested for the option? It was an assignment question and my answer was the value of options are same when the underlying price is equal to the call price I hope my answer is correct. Again thank you so much for your quick reply. Hi Eli, The options will be approximately equal when the strike price is the same as the stock price ATM. Well, it's really when the "forward price" of the stock is the same as the strike price where the forward price takes into consideration the interest rates and dividends of the stock. Hi Peter, Many thanks for your kind response. I learned many terms via your answers: My market is that in what condition the value of a call option and a put option of a stock with the same maturity date can be equal? Kris April 6th, at There are two parties: The person who bought the put option is also called the holder. He has the right but not the obligation to sell the underling stock. However, the writer also known as option seller has the obligation to buy back the underlying stock if the holder choose to exercise the put option. So the seller of the put option will buy back the stock if the buyer of the put option choose to exercise their right, even when the market price if much lower than the exercise price. Yep, you put have bonds and bills as underlying assets - you can also trade options on an index, forex, commodity put, agricultural futures and even weather futures. Check out the CME for more. If the options are ITM then you won't have any trouble selling them back - there will always be a buyer. The buyers will almost always be market makers who are obligated by the call to provide a two way market in option contracts. Market makers will place bids on these ITM options based on the fair value of the option in an attempt to hedge it back with the underlying stock. If options depreciate as they near their expiry date are they difficult to sell even if they are well in-the-money? Why would option option value matter when the broker will pay the profit even after the option expires? Hi Paul, All options can be traded out i. And yes to your second question - as settlement type is irrelevent you can sell the option option in market to option a profit. Physical delivery just means that if you do hold the option until the expiration date and decide to "exercise" the option, you will need to deliver or be delivered the underlying asset that the option is based on - as apposed to simply receiving a cash settlement. Hi Peter, Me again. If so, why is it called a physical settled option? So, even though the shares only went up 3. Would it be correct to say that a physical delivery option is an option which must be exercised and cannot be sold? Hi Paul, there isn't anything about the option that tells you the settlement type - you call have to check out the specifications with call exchange. If you search option exchange website for "contract specifications" you'll usually find it ok. Generally speaking I would say that equity options options based on a stock are physically settled and index options are cash settled. Can you tell me how to distinguish between physical delivery options and cash settled options. In other words, if I only want to buy options which can be sold for cash - how can Call distinguish these from physical delivery options. Hi Sash, Thanks for the positive feedback! Market, about the option - it depends on how bullish you are on the stock. That is ti say how far you think the stock will move after the open. At-the-money options are most sensitive to stock price changes and hence will have large gains initially, however, the further the stock moves away from the strike price the less sensitive the changes become. For this reason you may want to look at options that are slightly out-of-the-money. This way as the stock approaches the strike price it becomes more sensitive to the stock price movements and the option's percentage return will be far greater. This concept of sensitivity has to do with the option's Delta sensitivity to stock price movements and Gamma the option's delta sensitivity. If you expect a very large move, then you would choose an option that is very far out-of-the-money, which would likey have a very low purchase price. And as the stock rallies hard towards the strike price the more value it gains - but more importantly the more percentage gain on the initial purchase price of the option. Peter, First of let me THANK YOU for putting together this site. I am lucky to stumble across this site. You did a great job explaining a concept that is so difficult to understand atleast for me. Lets say I determine based on research that a particular stock eg: X is put to go up today before the stock exchange open. If so, how do I determine which call option to pick? Should I select a call market that has high open interest or should I go with an option that has high volume? Thank put so much again! Good bless your heart! Yes, the stock price can only go to zero, but the terminology for the profit on the option is still most commonly known as being "unlimited". There is an error in your text in paragraph 8. It says "buyer's of put options have unlimited profit potential" when in fact profit is limited at 0. Hi Kris, nobody would but that is the risk you take when you "sell" an option as apposed to "buy" an option. The buyer has the "right" to exercise and the seller has the "obligation" to deliver if the buyer decides to exercise. This is how most people would trade options I'm not sure about your second question though. Can you buy an option, let's say a call option, with no intention of exercising it, but rather merely the expectation of trading out of it? Can you take advantage of the leveraging situation without risking needing to actually pay for the stock - that is, if the stock moves into a profitable range, sell the option rather than exercise calland if not simply pay the premium. Is it market that you would decide to sell the option and not be able to? Option Types There are two types of option contracts: Call Options and Put Options. Call Options give the option buyer the right to buy the underlying asset. Put Options give the option buyer the right the sell the underlying asset. To get a better understanding of the payoff of a put option, take a look at the following option strategy graphs: Long Put Option Buying a Put Option Short Put Option Sell a Put Option And then compare put option graphs to the following call option graphs: Long Call Option Buying a Call Option Short Call Option Selling a Call Option. Options What are Options? Where are Options Traded? Option Types Option Style Option Value Volatility Time Decay In-The-Money? Payoff Diagrams Put Call Parity Weekly Options Delta Hedging Options Asset Types Index Option Volatility Option Currency Options Stock Options. Comments 62 Anthony June 6th, at 1: Wohooooo Peter January 2nd, at Peter January 2nd, at Manojg December 28th, at 9: Peter July 4th, at 1: Jake July 3rd, at 9: Peter May 8th, at 1: Regards, anjan May 2nd, at 1: Peter April 29th, at 6: Peter April 16th, at 7: You can see the payoff graphs of the two in the below links; Buying market Call Option Selling a Put Option Charles April 16th, at Peter March 30th, at 9: Tony March 30th, at 3: Peter March 27th, at 5: Almas March 27th, at 4: Peter March 26th, at 8: Achu Anil March 21st, at 2: Arick March 15th, at Peter February 14th, at 4: Amarendra nath Roy February 14th, at 4: Peter December 20th, at 4: Daniel December 20th, at 4: Peter December market, at Ravi December 12th, at 3: Peter December 8th, at 3: Daniel December 8th, at put Peter November 21st, at 7: Peter November 19th, at 5: Sarah November 18th, at 4: And why do we use it? Peter November 17th, at 4: Rajesh November 17th, at 8: Eli October 7th, at 5: Peter October 6th, at 5: Eli October 6th, at 3: Market August 13th, at Peter August 7th, at 7: Rachel August put, at 7: Peter May 18th, at 5: Paul February 23rd, at 9: Peter February 22nd, at 7: Paul February 22nd, at 3: Peter February 22nd, at 5: Paul February 22nd, at 4: Peter January 19th, at 9: Sash January 19th, at 8: Peter September 23rd, at 6: Dave September 21st, at market Peter April 8th, at Peter May 12th, at call Glen O'Riordan May 8th, at Admin January 9th, at 6:
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