Stock options include call options and put options. Call options give the holder the right to buy a stock at a specific price within a certain period, offering the potential for profit if the stock price rises. Put options allow the holder to sell a stock at a predetermined price, beneficial if the stock price falls. Both types offer leverage, as they control more stock value than the capital required to purchase the option. However, they come with high risk, including the total loss of the premium paid, market volatility, and time decay. Options trading requires an understanding of complex market factors and is generally more suitable for experienced investors.
Call option
A call option is a financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a predetermined time frame. The specific price is known as the strike price. When investors buy call options, they anticipate that the asset’s price will rise above the strike price before the option expires. If this happens, they can buy the asset at the lower strike price and potentially sell it at the higher market price, realizing a profit. However, if the asset’s price doesn’t rise above the strike price, the option will expire worthless, and the investor loses the premium paid for the option. The risk is limited to the premium, while the potential reward can be significant if the asset’s price increases substantially.
Put option
A put option is a financial derivative that gives the holder the right, but not the obligation, to sell a specific asset (like a stock) at a predetermined price, known as the strike price, within a specific timeframe. Investors buy put options when they anticipate a decline in the asset’s price. If the asset’s price falls below the strike price, the option holder can sell it at the higher strike price, potentially profiting from the difference. If the asset’s price stays above the strike price, the option may expire worthless, and the investor loses the premium paid for the option. The risk is limited to the option’s premium, while the reward is maximized if the asset’s price drops significantly.
Guide
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