Call Options are financial contracts that give the buyer the right, but not the obligation, to buy stocks, bonds, commodities, or other assets or instruments at a specified price within a specified period of time.
Among them, stocks, bonds, or commodities are called underlying assets, and the buyer of a call option increases the price of the underlying asset.
A call option is a right to buy something in the future.
Let me give you an example:
Let's say you have your eye on a $1 million house, but you have to save for five years to get a down payment.
At the same time, you always feel that the house will be more expensive in five years, so you sign a contract with the seller and pay $50,000.
The contract says you will buy the house after five years for $1 million. If the house sells for more than $1 million after five years, you have the right to buy it for $1 million and make a profit. But if it falls below $1 million, you're not obligated to play at the $1 million price that you said you were going to pay, and you can just buy it at the bottom price.
First, options are often mentioned in some stocks, commodities, and so on.
Second, when the stock market wobbles or falls, there are often options bosses who show off. Especially if most people are losing money, they can get a steady income from the option.
Trade call options at the break-even point.
In the example above, it's a buy- call option, while the real estate developer is a sell- call option.
The break-even point for buying a call option = strike price + premium. For example, if your break-even point is $1.05 million, but in five years the house you wanted only increased by $40,000, you would actually lose money.
In other words, you would only make money if the price of the house increased by more than $50,000 a year.
Put options are also a contract that gives the option buyer the right, but not the obligation, to sell (or short) a specified amount of the underlying security at a predetermined price within a specified period of time. A put option gains value as the price of the underlying asset declines.
A put option is the right to sell something in the future.
Here's an example:
Let's say you're a potato farmer, and the potatoes aren't ripe yet.
Since more and more people have grown potatoes in recent years, you always feel that when the potatoes ripen this year, the price will fall, hurting you. So you sign a contract with the buyer.
The contract says that when the potatoes are ripe, they'll sell for $1,000/ton. If the market price is below $1,000, you have the right to sell them for $1,000/ton. But if the price goes up by more than $1,000 / ton, you don't have to exercise the option contract, you can still sell it at a market price greater than $1,000 /t. If you want this put option to be valid, you need to pay a certain premium, such as $100.
Some people may ask, "Doesn't this mean there is no loss?" Of course not. When you sign the contract, you will need to pay a premium. If your judgment is wrong, you will also lose the premium fee.
You may remember the word "short" in the news. When it comes to action, one of the actions of a bear is to sell a put option.
Put break-even point = strike price - premium.
For example, for farmers, signing a contract is equivalent to buying a put option. Assuming a ton of potatoes are sold, then the break-even point = $900 (1000-100).
Simply put, if the price of potatoes is below $900 a ton after maturity, the farmer will not lose on the deal.
To learn more about options, click here:
Lesson 1: What is an Option?-Tiger Options Tour For Beginners