Call options – provide the holder the right (but not the obligation) to purchase an
underlying asset at a specified price (the strike price), for a certain period. If the stock
fails to meet the strike price before the expiration date, the option expires and becomes
worthless. Investors buy calls when they think the share price of the underlying security
will rise or sell a call if they think it will fall. Selling an option is also referred to as
”writing” an option.
options – give the holder the right to sell an underlying asset at a specified price (the
strike price). The seller (or writer) of the put option is obligated to buy the stock at the
strike price. Put options can be exercised at any time before the option expires. Investors
buy puts if they think the share price of the underlying stock will fall or sell one if they think it will rise. Put buyers – those who hold a “long” -put are either speculative buyers looking for leverage or “insurance” buyers who want to
protect their long positions in a stock for the period covered by the option. Put sellers
hold a “short” expecting the market to move upward (or at least stay stable) A worst-case
scenario for a put seller is a downward market turn.
The maximum profit is limited to the put premium received and is achieved when the
price of the underlying is at or above the option’s strike price at expiration. The maximum
loss is unlimited for an uncovered put writer.