Understanding options put and call
There are several exchanges, and all are coordinated through a central clearing house. That asset is almost always shares of the stock of a given company, or of an exchange-traded fund.
For example, the underlying asset might be shares of Apple stock. For each underlying asset , there are many different options available.
Above is a small sample of the options for Apple stock for just one expiration date, December 16, The Strike column in the center of the chain lists the strike prices that are available. The columns to the left of the Strike column refer to call options, while those on the right refer to puts. In this list that right is good through December Once you have paid for a call option you can buy one for the price shown in the Ask column, times , you then have the right buy the stock at that price no matter what the market price of Apple stock is at some future date between now and expiration.
This will allow you to make money if Apple stock goes up while risking only a small fraction of the stock price. If you own the stock, this is like a guaranteed stop-loss. Besides the options listed above that expire in December, there are other expiration dates available as shown below:. The expiration dates above range from November 11, , which was just 2 days away when this article was written; to January 18, , more than two years away. For every one of those expiration dates there is a list of available option strike prices that is similar to the one in the first diagram above, altogether there are over options for Apple stock.
Once you understand the world of options, all these possibilities are open. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price. Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value.
Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively. But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree. Remember, when a call is exercised, stock must be delivered by the seller of the call. If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous.
As indicated, many option strategies involve great complexity and risk. For this reason, not all options strategies will be suitable for all investors. In fact, with the exception of sophisticated, high net worth individuals who can afford and are willing to incur substantial losses, the writing of puts or uncovered calls would be unsuitable for just about everyone. Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do not understand the risks.