Using Option Strategies
Using Option Strategies
An option is the right to buy or sell something at a preset price within a given timeframe. It is usually a contract to buy or sell stocks or other exchange-traded commodities. The value of the option is based on the value of the stock or index for which it is contracted. Securities, indexes, currencies, interest rates, and debt securities can be optioned.
Things To Know
- If you think the price of the security will go up, you buy a call option.
- If you think the price will go down, you buy a put option.
Call options and put options
If you think the market price of the underlying security will go up, you buy what is known as a call option. If you think the price will go down, you buy a put option. The owner of the call option has the right to buy the security at a set price for a fixed period of time. The owner of the put option has the right to sell the security.
If an investor wants to invest in a riskier stock while limiting risk to a fixed amount, he or she can buy a call. If the investor believes the market will decline, he or she can buy a put to sell above its future market value.
What is the value of an option?
The value of an option depends on the relationship of the strike price to the market price of its underlying security. If the strike price of a call is below the market price of the security, the option is said to be "in the money," because it gives you the right to buy the security for less than its market price. Similarly, a put option is in the money if the strike price is above the market price. If the strike price of the put is below the market price, it has no intrinsic value; options with no intrinsic value are said to be out of the money.
Buyer beware
The latter scenario shows why caution is in order. Due to the special risks and complexities associated with options, they may not be suitable for all investors. Please contact your financial representative for the appropriate options disclosure documents.
Each option on a stock corresponds to 100 shares. Suppose you expect a stock price to increase. You purchase an October 100 call option. If the price of the stock rises to 102, you make a profit of 2 points, or $2,000.