- A stock option is a contract that assumes some future event. An option allows the investor that holds it to either buy or sell stock for a specific price, within a specific time in the future. Many investors buy options for an upcoming month as they plan their investment strategies. There are two primary types of options, call and put.
- A call option is a buying option, a contract that allows an investor to purchase a specific stock at a specific price in the future. The option is limited by shares. Each option specifies the number of shares that the investor can buy. The creator of the call option will charge the investor a premium to purchase it, based on the option's stock price and timeframe.
- A put option is similar to a call, but allows an investor to sell stock at a certain price instead of buying it. Investors cannot purchase a put option to sell stock above it market value, but they can purchase a variety of puts to sell the stock at lower values than it currently has in the market. This allows investors to protect themselves if they believe that stock prices will fall rapidly in the coming months.
- Many investors use options as extra security. An investor can buy an option that allows for the opposite action made with the actual stock. If the trade goes badly, the investor can activate the option later and minimize losses. Experienced investors may also buy call options to purchase stock at a discount if it looks like the stock price is rising. Other investors create and sell options to earn a profit.
- The investor who buys an option is usually confident that the option will eventually save money. For experienced investors this may be an easy guess, but guessing when a stock will change is more difficult. Options have expiration dates, after which they are useless. If an expiration date comes, the investor that created and sold an option at a premium will benefit, but the investor who bought the option will only lose money.
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