STSM112070 - Derivatives: introduction to options: call and put options
A 鈥榗all鈥� equity option contract and a 鈥榩ut鈥� equity option contract are two basic types of options.
Call Options
A 鈥榗all鈥� option contract - gives the holder the right to buy the specified underlying securities from the option writer/issuer at an agreed price (commonly called the 鈥榮trike鈥� price (see STSM112010)) within a specified future date.
A person who believes the open market price of a stock or share will increase may decide to buy the right to purchase the stock (i.e. a call option).
If the open market share price of the stock or shares at or before expiration of the option is above the combined agreed option 鈥榮trike鈥� share price and premium paid for the option, the option holder is in profit and it is likely that they will exercise the option.
Put Options
A 鈥榩ut鈥� option contract - gives the holder the right to sell the specified underlying securities to the option writer/issuer at an agreed 鈥榮trike鈥� price within a specified future date.
A person who believes the open market price of a stock or share will decrease may buy the right to sell the stock (i.e. a put option).
If the open market share price of the stock or shares at or before expiration of the option is below the combined agreed option 鈥榮trike鈥� share price and premium paid for the option, the option holder is in profit and it is likely that they will exercise the option.