The purchaser of a claim option has the right, but not the obligation to buy at an exercise price the number of shares covered by the contract. Options are usually used for backup purposes, but can be used for speculation. In other words, options typically cost a fraction of what the underlying stocks would do. The use of options is a form of leverage that allows an investor to make a bet on a stock without having to buy or sell the shares directly. Both types of contracts are selling and calling options that can be purchased both to speculate on the direction of stocks or stock indices and be sold to generate income. For stock options, a single contract includes 100 shares of the underlying stock. Buyers of selling options speculate on the fall in the price of the underlying stock or the underlying index and have the right to sell shares at the exercise price of the contract. If the share price is lower than the exercise price before the expiry of the exercise price, the buyer may either sell the seller`s shares for sale at exercise prices or sell the contract if shares are not held in the portfolio. ABC`s shares sell for $60, and a caller wants to sell calls for $65 for a month.
If the share price remains below $65 and the options expire, the caller retains the shares and may receive an additional premium by reseating the calls. . The terms of an option contract indicate the underlying security value, the price at which that guarantee can be paid (strike price) and the expiry date of the contract. A standard contract includes 100 shares, but the amount of the stock can be adjusted for share fractions, special dividends or mergers. If the share price rises to more than $65, the buyer calls the seller`s shares and buys them for $65. The call buyer can also sell the options if the purchase of the shares is not the desired result. In the case of a call option transaction, a position is opened if the seller has acquired a contract or contract also called Writer. During the transaction, the seller receives a bonus to make a commitment to sell shares at the exercise price. If the seller holds the shares to be sold, the position is called covered call. Sellers have the right, but not the obligation to sell shares at the exercise price in the contract. On the other hand, options sellers are required to carry out their business when a buyer decides to execute a call option to acquire the underlying warranty or to execute a sale option for sale. An option agreement is an agreement between two parties to facilitate a potential transaction on the underlying security at a predefined price, called strike price, before the expiry date.