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An option is a derivative trading product whose performance is closely related to that of its underlying security. For instance in a stock option, its success or failure depends very much on how its underlying security ie. the stock is performing.
There are basically 2 types of stock options :
Calls &
Puts.
A Call is simply a contract which gives the buyer the right, but not the obligation, to buy a stock at a specific price (known as the “strike price”) on or before a expiration date (the 3rd Friday of the month of the call option bought).
A Put, on the other hand, gives the buyer the right, but not the obligation, to sell a stock at a specific price (“strike price”) on or before a expiration date (the 3rd Friday of the month of the put option bought)
The price that you pay for an option contract is a premium. The premium that you pay for a particular option at a particular time is determined by options market makers.
Each option contract is equivalent to 100 shares, thus if a option is quoted as $3, the premium you have to pay for this option would be $300 ($3 x 100).
Basically, if you anticipate a particular stock to move up in the short-term, you would buy a call. If you expect the afore-said stock to drop, you buy a put. To make myself remember whether to buy a call or put option when I was just started to understand it initially, I just remember these phrases :
Call Up (Buy a call in anticipation of stock going up – when you are Bullish)
Put Down (Buy a put in anticipation of stock going down – when you are Bearish).
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