Options are regarded as legal contracts that allow one party or an individual the ability to buy or sell stocks or investments to other party or individual in the future to earn a profit. The put and call options are considered by many novice investors and traders as being very hard to understand. Although there are many intricate options of the trading strategies, the most basic of the options are very much easy to know and understand. You just need to understand well the terms and definitions of the different contracts.
First is the strike price. It is the price where the stocks will change hands upon the execution of an option. The strike price is referred also as the exercise price. For instance, is there is a $10 strike price of a call option, then the one who sells the option will sell the stock of shares to a buyer for $10 also regardless of the latest and current price of the investment or stock.
Next is the premium. The premium in this options language is the upfront payment. In the call options, the buyer pays the seller of that particular option a certain premium to give him or her ability to buy the share of stocks in the future from the seller at its strike price. This premium cost is determined by a number of factors that includes the stock price, the distance of stock price from the strike price and also the volatility of the present underlying stock.
Another one before the definition of put and call options is the expiration. All the options have a specific expiration date. This means that it is the last day of a buyer to purchase shares of stock from the seller. Also, it is the last day of the buyer to sell the stocks to its seller. For example, all stock options expire every third Saturday of the month.
Then there is the buying of a call option. This buyer has the right to buy shares of stock at its strike price or cost from the seller of options in the future. The buyer of the call option has the capability to purchase the shares, but do not have any legal obligation or binding to do so. However, in return for this capability, the option buyer will pay an upfront premium cost of the option to the seller.
Next is the selling of a call option. The seller gives the buyer or investor the right and ability to purchase his shares of stock for a fix predetermined price or what we call the strike price. However, in return, the seller of the option can receive from the buyer the upfront premium cost. If, however, the call option buyer decides to buy the shares of stock, it is a requirement that the seller sell the shares.
Last but not the least is buying and selling of put and call options. The buyer has the ability, but without any obligation to put up a sale of his stocks at the strike cost or price to the call option seller. In selling a put option, the seller must purchase the shares of stock from its buyer if he or she exercises the options.