Call Option and Put Option

Let's start with a story that illustrates the nature of the option.

Someone dreamed of a stretch near the ocean. Such a site is a commodity not only expensive, but also rare. Getting to the land markets, he instantly finds a buyer. One day, while walking near the shore, a man saw a man walking freely along the beach. Deciding that this is the owner, Someone asked him to sell the land to him. The man agreed, having sounded the price: one million euros. Making sure that the man is really the owner of the land he liked, Someone immediately began to lean toward the deal. The named amount for such a product was not large, Someone understood this, but he did not intend to admit to the man, because the land really was worth more, and it was necessary to spend time on a real valuation of the cost. Then Someone suggested: "I will leave you 10,000 euros in return for a receipt that will give me the right to purchase this land for a month for a million euros.If I do not bring a million euros during this time, then you leave money to yourself." The man agreed.

In the evening, Someone told about buying a site for people looking for a coastal zone to start a business. As a result, the plot was sold at 400% more expensive. Someone managed to earn a large sum on a product that he did not even own.

This deal could end like this:

1. Someone would have acquired the land, using his right for a month, and sold (resold) it again, spending additional resources on registration, re-registration, taxes, etc.

2. Someone could sell the receipt (the right of purchase), earning 400% of net profit.

3. Someone could not use the right of purchase in general and lose their 10,000 euros.

We have come to the concept of "options". What is it? In this case, this is exactly the right to purchase land during the thirty days indicated in the receipt. This right (in the form of a receipt) has itself become a commodity, and the commodity is independent. In other words, what is bought can be sold. Actually, this is the nature of all call options.

Call option - the right to purchase the underlying asset at a predetermined price. Let's go back to the story. Someone paid the man ten thousand euros for the right to purchase land for a month, therefore, the call option cost 10,000 euros in this case.

For options there is an expiration date. In this story - 30 days. Then the option will no longer cost a penny. Therefore, it is necessary to execute an auction call before the specified date, or to sell.

This applies to shares. You can buy shares yourself using a call option, or you can sell this right on an options exchange. Usually buyers of options do not go to the costs and hassles associated with the execution of purchased options, like the main character of our history. After all, the purpose of the deal is to resell and generate income.

By the way, there are "inverted" call options - option-puts.

Options are new dimensions in the movements of the market, and therefore they are complex for rapid development. Let's say that there are two moves with stocks: buy (long position) and sell (short position). These positions are mutually exclusive: either long or short. But with options, several actions are possible at the same time, but this is clearly not for lazy minds who fear the complexity of option trading.

So, the call option can be, like a put-option, and bought and sold. And here it is possible to stay in four positions simultaneously in relation to one asset (option spreads).

The put option can be illustrated by the example of an insurance policy. By purchasing it, you want to insure, for example, real estate. If this is an insurance policy for a house, then, in fact, you buy the right to sell an insurance company's home at the N-th price, regardless of what will happen in the future. But the law operates under specific, specific conditions and a specific, definite time. Taking money for insurance, the company undertakes, if necessary, to redeem this house from you. The more you determine the duration of the policy, the more money an insurance company will require, since there are more risks and uncertainties over longer periods of time. Similarly, in put options: the expiration dates are higher, so they are more expensive. But the insurance policy is set by conditions, but in options there is no such. It is enough to fall to the underlying asset below the strike price. In addition, on the stock markets, put options can be sold to anyone and at any time, and an insurance policy is not.

Options, as you have already understood, are a commodity. For investors who are accustomed to the state of risk and profit, this is a great tool. It is thanks to option trading (and only to it) that it is possible to increase the effect of movements of underlying assets without increasing the risk. For those who are far from option trading and are confident that large profits are associated with huge risks and large losses, this assertion is illogical. But options do give a chance to get the highest possible return with good price movement, as their purchase entails incommensurably lower costs, and the risk is minimal. You can earn money only if the assets are properly calculated.