An option is a contract to buy or sell a specific financial product known as the option's underlying instrument or underlying interest.
Comment Synopsis ET enlightens the reader on the difference between a call option seller or writer and a call option buyer. ET enlightens the reader on the difference between a call option seller or writer and a call option buyer. In this series of classroom, ET enlightens the reader on the difference between a call option seller or writer and a call option buyer. What's a call option? An instrument that gives a buyer the right but not the obligation to purchase the asset underlying the call option at a preset price on a future date.
For equity options, the underlying instrument is a stock, ETF or similar product. The contract itself is very precise.
The financial product a derivative is based on is often called the "underlying. What Are Call and Put Options? Options can be defined as contracts that give a buyer the right to buy or sell the underlying asset, or the security on which a derivative contract is based, by a set expiration date at a specific price.
It establishes a specific price, called the strike priceat which the contract may be exercisedor acted upon. Contracts also have an expiration date.
When an option expires, it no longer has value and no longer exists. Options come in two varieties, calls and puts. You can buy or sell either type.
What is an Option? Put and Call Option Explained
You decide whether to buy or sell and choose a call or a put based on objectives as an options investor. Buying and Selling If you buy a call, you have the right to buy the underlying instrument at the strike price on or before expiration. If you buy a put, you have the right to sell the underlying instrument on or before expiration.
- Call options: Right to buy versus obligation
- Option Buyer v/s Option Writer
- Call and Put Options: What Are They?
In either case, the option holder has the right to sell the option to another buyer during its term or to let it expire worthless. The situation is different if you write or sell to open an option. Selling to open a short option position obligates the writer to fulfill their side of the contract if the option holder wishes to exercise.
When you sell a call as an opening transaction, you're obligated to sell the underlying interest at the strike price, if assigned. When you sell a put as an opening transaction, you're obligated to buy the underlying interest, if assigned.
As a writer, you have no control over whether or not a contract is exercised, and you must recognize that exercise is possible at any time before expiration.
Call Option: Difference between a call option seller & buyer - The Economic Times
However, just as the the option buyer has the right can sell an option back into the market rather than exercising the option buyer has the right, a writer can purchase an offsetting contract to end their obligation to meet the terms of a contract provided they have not been assigned.
To offset a short option position, you would enter a buy to close transaction. At a Premium When you buy an option, the purchase price is called the premium. If you sell, the option buyer has the right premium is the amount you receive. The premium isn't fixed and changes constantly. The premium is likely to be higher or lower today than yesterday or tomorrow. Changing prices reflect the give and take between what buyers are willing to pay and what sellers are willing to accept for the option.
The point of agreement becomes the price for that transaction.
The process then begins again. If you buy options, you begin with a net debit. That means you've spent money you might never recover if you don't sell your option at a profit or exercise it.
How to be a better Options Buyer
If you do make money on a transaction, you must subtract the cost of the premium from any income to find net profit. As a seller, you begin with a net credit because you collect the premium.
Options are financial instruments that provide flexibility in almost any investment situation. Options give you options by providing the ability to tailor your position to your situation.
If the option is never exercised, you keep the money. If the option is exercised, you still keep the premium but are obligated to buy or sell the underlying stock if assigned.
The Value of Options The worth of a particular options contract to a buyer or seller is measured by its likelihood to meet their expectations. In the language of options, that's determined by whether or not the option is, excellent earnings online is likely to be, in-the-money or out-of-the-money at expiration.
A call option is in-the-money if the current market value of the underlying stock is above the exercise price of the option. The call option is out-of-the-money if the stock is below the exercise price. A put option is in-the-money if the current market value of the underlying stock is below the exercise price.
A put option is out-of-the-money if its underlying price is above the exercise price.
Call Options: Right to Buy vs. Obligation
If an option is not in-the-money at expiration, the option is assumed worthless. An option's premium can have two parts: an intrinsic value and a time value. Intrinsic value is the amount that the option is in-the-money. Time value is the difference between the intrinsic value and the premium.
- CALL AND PUT OPTIONS – CMA
- The Options Industry Council (OIC) - What is an Option?
- The Options Industry Council (OIC) - Part 1
In general, the longer time that market conditions work to your benefit, the greater the time value. Options Prices Several factors affect the price of an option. Supply and demand in the market where the option is traded is a large factor.
This is also the case with an individual stock. The status of overall markets and the economy at large are broad influences.