Two Types of Option Contract

As an investor, it`s important to understand the different types of option contracts that are available. Not all option contracts are created equal and understanding the differences can help you make more informed investment decisions. In this article, we`ll take a closer look at two types of option contracts: call options and put options.

Call Options

A call option is a contract that gives the buyer the right, but not the obligation, to buy the underlying asset at a specified price (known as the strike price) within a specified period of time (known as the expiration date). The buyer of a call option is expecting the price of the underlying asset to go up, which will give them the opportunity to buy the asset at a discount.

For example, let`s say you have a call option for 100 shares of XYZ stock with a strike price of $50 and an expiration date of one month from now. If the price of XYZ stock goes up to $60 before the expiration date, you can exercise your call option and buy the 100 shares for $50 each, even though they are currently trading at $60 each. You can then sell the shares for a profit or hold onto them in the hopes that the price will continue to go up.

Put Options

A put option is a contract that gives the buyer the right, but not the obligation, to sell the underlying asset at a specified price (known as the strike price) within a specified period of time (known as the expiration date). The buyer of a put option is expecting the price of the underlying asset to go down, which will give them the opportunity to sell the asset at a higher price.

For example, let`s say you have a put option for 100 shares of XYZ stock with a strike price of $50 and an expiration date of one month from now. If the price of XYZ stock goes down to $40 before the expiration date, you can exercise your put option and sell the 100 shares for $50 each, even though they are currently trading at $40 each. You can then buy the shares back at a lower price to make a profit or hold onto the cash.

In Conclusion

Understanding the differences between call options and put options is important for any investor who wants to engage in options trading. While options trading can be risky, call and put options can provide a way to hedge your positions or take advantage of market movements without having to hold the underlying asset. So the next time you`re considering an options trade, make sure you know which type of option contract you`re dealing with – a call option or a put option.


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