What Are Option Definition?
Defined as the financial securities are offered for sale by the person in an option contract to the buyer for the sake of premium. The buyer is not obligatory to sell or buy the underlying asset on the decided price in the specific period. Every option worked out in a specific time period; for example option in America exercised before the expiry date. Here the meaning of exercising or work out meet means the use of the right to sell or buy the financial security.
Types of Options
Two kinds mostly used call and put option. Options stocks are more attractive for investors to get high profits.
An investor can buy any kind of option to hedge and speculations. Option writer also generates income through earning a premium. Normally stock option is denoted by 100 shares. If the cost of each share is 0.40 dollars the total cost of the option will be 40 dollars (100×0.40 $).
Two types of option: one is known as a call option and the other one is known as the put option.
Call Option Definition:
At strike, the buyer has a right in the call option to purchase a financial security. The intention behind this purchase is that the buyer wants to see the appreciation in stock price. Similarly, the option writer is bound to sell the financial security at strike price to the option buyer.
The person who sells shares his intention that the shares price will remain the same or reduce in comparison to strike price before the expiry date of the option. The option write earns income in the form of premium during the sale of a financial security.
If the stock price is increased more than the strike price, then the buyer will purchase stock on the strike price and will offer for sale on current market value. The difference between the strike price and market price is profit earned by the option buyer. Similarly, if the stock price is not increase or lower than the strike price then it means that buyer will lose the premium amount.
The formula for calculation of profit: the current market value of a stock-(strike price + premium paid).
Put Option Definition:
In types of options this option facilitated the buyer to sell their underlying security at the strike price, so in such kind of option, the buyer wants a decrease in the price of the financial security. In this option, the person who sells the security is known as the option writer.
This type of option, the buyer is expecting to decrease in the price of stock below than the strike price before the expiry date of the option. However, the option writer wants to see an increase in the price stocks more than the strike price.
When the financial securities are high than the strike price before the expiry of option contract then the profit is earned by the put option writer. However, the holder of the option earns premium when the stock’s price falls from the strike price.
The options finance has been gaining popularity. Investor’s main objective is to earn profits by minimizing the risks. So, it is a good option for investors to invest in option stocks where they can generate profits. It also depends on the investor which kind of above strategy put option or call option he wants to implement.