Call Options Trading for Beginners in 9 min. – Put and Call Options Explained

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Despite the fact that there is often significant amounts of reward in dealing or investing in shares of stock, you have a boatload of high risk, considering that the value of your share of stock can go down. How can you protect yourself alongside this risk? Have a glimpse at this story. Let’s say that you buy a stock of XYZ Company at $10 per share. You aspire to keep this stock for long-lasting investment, with the likelihood of selling it at a really good price in the future; maybe even as high as $15 in the future (maybe 3 years from now). Of course, you’re also worried about the danger that your XYZ $10 stock may go down in price, like possibly to $5. If this comes about, you will have lost half of your money. Therefore, what steps do you take? You enter into an understanding with ABC Company (different from XYZ), which pledges that even when the value of your XYZ $10 stock drops in the stock market to $5 or possibly zero, ABC will guarantee that they are going to be prepared to receive your share at the same $10 for which you acquired your share of stock for (and this is just in case you elect to sell the share of stock to them). That way, you are protected against “downside” harm if the stock fails, however you still are able to get any plausible “upside” reward if your share goes up in value. So that you can formalize this contract, ABC Company issues you a sheet of paper as evidence that your particular agreement exists. What exactly is this piece of paper termed? It’s known as an “option” or a “stock option”. For what reason is it labelled as an ‘option’? Because you, the owner of your option, currently have the “choice” or “option” to sell your stock to ABC Company at the particular $10 price if ever you opt to use or “exercise” the option. When you are the possessor of the option, ABC Company will be the one providing you with that choice, thus it is known as “issuer” of your option. The option talked over above, by which you have got the choice to sell a stock to ABC Company at a set worth even if your stock price goes down is more specifically labelled a “put” option. There’s also another option defined as a “call” option, which, in a way, is the “opposite” of a put option. Instead of having the choice to sell a stock at a certain selling price even when the worth goes down, you have got the choice to buy a stock at a specified selling price even if the price rises. Considering that the idea of a call option is just as lengthy as a put option, it will best be handled in its own sole video which you can watch above. Be sure to note that in real life, you usually do not procure options straight from the issuing company (in our example above, it was ABC Company). Rather, you would definitely obtain or sell options from an options “exchange” which happens to be analogous to a stock exchange although where options are bought in place of stocks. http://www.youtube.com/watch?v=q_z1Zx_BALo

Comments

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When the option contract expires and they haven't exercised the contract and bought the stock, does the stock automatically sell or must it be exercised?

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