During the validity period of the contract, if the stock price does rise and exceeds the proposed price of the contract, the buyer can exercise the purchase right and buy the stock at the proposed price. If the stock is sold after purchase, the difference between the actual price and the proposed price can be earned.
When the stock price does not rise, or the increase does not exceed the total amount of the proposed price plus the option premium, if the buyer exercises the option contract, there may be a certain loss. At this time, the buyer can choose not to exercise the purchase right. At this time, the buyer’s maximum loss is the option premium paid previously.
Here is an example of a call option:
Assume that the current market price of ABC Company’s stock is $100 per share. You believe that ABC Company’s stock price will rise in the future, so you buy a call option with an expiration date of 3 months in the future and an exercise price of $110. You pay $5 for the option.
If the stock price of ABC Company rises to $120 or above in the next 3 months, you can exercise your option and buy ABC Company stock at $110. This means you will receive $10 per share (after deducting the option fee you paid).
Conversely, if the stock price of ABC Company does not rise to $110 or above within the next 3 months, you will not exercise your option and you will only lose the $5 option premium you paid.
What is a Put Option?
Put option, in English, is called Put Options.
A put option means that the option buyer has the right to sell a certain amount of the underlying asset at a proposed price during the validity period of the option contract. During the price formulation process, the buyer often believes that the value of the underlying asset will fall, and earns the difference between the proposed price and the actual price on the exercise date.
When you buy a put option, you get the right to sell an asset at a specific price on or before a specific date. Generally, it means that you predict that a stock will fall in the future, so you hold the stock and sign a put option with the seller.
In the stock world, put options are also called “put options” or “sell options” .
During the validity period of the contract, if the stock price falls and drops below the proposed price, the buyer can exercise the right to sell, and the seller must buy the stock at the proposed price. At this time, the buyer can earn the difference between the proposed price and the actual price of the stock.
Of course, if the stock does not fall, or the falling price does not fall below the proposed price, then there is no point in exercising this put option, so the buyer will choose to give up exercising the option contract and only lose the option fee.
Here is an example of a put option:
Assume that the current market price of XYZ Company’s stock is $50 per share. You believe that the stock price of XYZ Company will fall in the future, so you buy a put option with an expiration date of 3 months in the future and a strike price of $40. You pay $3 for the option.
