Buying a put option gives a person the right, but not the obligation, to sell a financial instrument at a predetermined price, called an exercise price. The sales potential remains available until the expiry date of the contract. Put options are a way for investors to bet against a stock, commodity or other financial instrument, as well as a way to hedge their investments. When you buy a put option, you are long a put. When you sell a put option, you run out of a put option. The opposite of a put option is a call option, which gives its holder the right, but not the obligation, to purchase an instrument. An early allocation can also result in a margin call (assuming you have enabled margin investing in your account) if the value of your account is lower than your margin maintenance requirements. If you have a margin call, there are a few potential stocks you can take: exercise your long contract, buy/sell shares by placing orders, or deposit enough money to cover the margin call. If you have a margin call and choose to exercise your long-term contract to reduce your margin deficit, your margin call may persist while your fiscal year is pending or if the fiscal year has not been sufficient to cover your margin deficit. If the exercise of your long contract is sufficient to cover your margin deficit, all margin calls must be completed once your exercise is processed.
Instead, let`s say the share price goes up to $120. When you sell the call option, your potential earnings per share is the difference between the share price and the strike price of the call minus the premium (share price of $120 – strike price of $110 – premium of $5 = $5 per share). If the contract is for 100 shares, you will win $500 again. Your put option should expire worthless because it is out of the money. Strike Price: This is the price at which you can sell the underlying share if you choose to exercise the option, regardless of the price at which the share is traded («Prevailing Market Price»). When buying a put, lower strike prices are usually associated with a higher risk of loss, provided that all other factors are constant. This is because the stock would have to fall more sharply for the option position to become profitable. For the sale of a fund-backed put, early allocation risk is one of the most common cases. The closer an option is to expiration, the less time value the option has. The further a contract is from its expiry date, the more potential there is for price movements that would generally cause the contract to trade at a higher price. Instead, suppose PURR`s share price falls to $35 per share when it expires. The option must be allocated so that you must purchase PURR shares for $45, which is $10 above the market price.
Assuming you sell the shares immediately at $35, the premium you received in advance partially offsets your loss of $10 per share. To calculate your loss per share, subtract the strike price from the expiry share price and add the premium you received. In this example ($35 – $45 + $2 = -$8 per share). So for a contract with 100 shares, you would lose $800. If you are assigned to your spread at the short stage (the sales contract you are selling), you must buy shares of the underlying security at the strike price. Since the owner has the right to exercise the contract or simply let it expire worthless, he pays the premium – the cost per share of the contract property – to the seller. As a buyer, you can think of the premium as the purchase price of the option. If you buy or sell an option before it expires, the premium is the price at which it is traded.
You can trade the option on the market in the same way as a stock. The premium is not arbitrary because it is linked to the value of the contract and the underlying security. The price of the underlying share, the volatility of the underlying share and the time remaining until its expiry affect the premium of an option. Suppose MEOW`s share price closes at $125 on the call expiration date. As this is the strike price, the call should expire worthless. Again, your earnings per share is the current share price ($125) minus the price you paid for the stock ($110), which is equivalent to $15. If the contract applies to 100 shares, you will earn $1,500 by owning the shares. However, to calculate your total profit, add up the $1 premium you received per share for selling a call option ($100 in total). In this case, your total profit for the strategy is $1,500 plus $100 or $1,600. If you had only bought and held 100 shares, the value of your shares would have increased by $1,500.
Contract: Each option typically represents 100 shares. The more contracts you buy, the more exposed you are to potential gains and losses on the position. The basic idea of selling a call option is this: you sell someone else the right to buy one of your shares at a predetermined price (the strike price) until a predetermined date (expiration). You will receive money in advance for this Agreement, which is referred to as the «Reward». If the share price is lower than the strike price on the expiry date, the buyer has no incentive to give (exercise) the option and you can keep the premium. On the other hand, if the share price is higher than the strike price, the buyer exercises the option and you must sell the share at the strike price. In this case, you would buy to open a call position. Buying a call gives you the right to buy the underlying shares from the option seller for the agreed strike price. From there, you can resell the shares on the market at their current market value if you wish. If it doesn`t look like the share price will rise above break-even on the expiration date, you may be able to sell the call to recoup some of your premium. (A buyer might be interested because there is still a chance that the share price will rise in the remaining time.) You can also sell your call if you don`t have enough money to execute it. In other words, you can`t afford to buy 100 shares of the underlying stock at the strike price.
The break-even point of an option contract is the point at which the contract would be cost-neutral if the owner exercised it. It is important to consider the premium paid for the contract in addition to the strike price when calculating the break-even point. Let`s see what happens if your expectations are good and the stock climbs to $130 before it expires. When you exercise the option, your potential earnings per share is the difference between the share price and the strike price minus the premium (share price of $130 – strike price of $120 – premium of $2 = $8 per share). If the contract applies to 100 shares, you will earn $800. Alternatively, if you sell the option, your potential earnings per share will be the difference between the sale price and the premium you originally paid to participate in the long call. The exercise price of an option contract is the price at which the option contract can be exercised. .