In the case of stock trading options, an option which gives the right to buy a certain number of stocks at a predetermined price is called a call while an option which gives the right to sell a certain number of stocks at a predetermined price is called put.
The holder of a Call option exercises his option contract only if it is to his advantage to do so, when the call reaches the strike price. Options can be used as a speculative medium with small, or relatively small, risk and with unlimited possible profit. They, options can also be used as protective contracts, they can protect either before or after a stock commitment. You can buy an option to protect a stock purchase or a sale already made or about to be made. You can acquire a Put contract to protect stock which you hold. You can buy a Put to protect against unlimited loss when you buy a stock. You can buy a Put to protect a profit which you already have and don't want to lose. Or you can acquire a Put or a Call to protect you against a commitment which you expect to make at a later date and on which, when you make such commitment, you don't want to take an unlimited risk. So an option can be a protective device as well as an investment vehicle, depending on how and when it is used. It is advisable to read more on this topic before investing
|
