Option are by no means simply an instrument for speculators shooting for maximum gains. They have a veriety of uses in the portfolio strategy of prudent investors; in particular, they can be a versatile and economic tool for managing risk.
An option is a contract, and there are just two kinds of options- a call and a put. A call gives its holder the right to buy- a put gives its holder the right to sell- exactly 100 shares of a particular stock at a specified price during the stated lifetime of the option. The stock named in contract is referred to as the underlying stock. The price specified is known as the exercise or striking price. The price specified is known as the exercise or striking price. The price that an option buyer pays, and a seller receives, is called the premium.
An option writer profits when the option he has sold expires worthless or worth less than the premium he received. A put becomes worthless when the underlying stock is at or above the striking price. A buyer is betting that the requiring writer of that particular put to buy the stock from him at the predetermined (higher) striking price.
The options exchanges bring together buyers and sellers in the same way as a stock exchange. An option buyer can, at any time before the expiration date, sell his contract to another investor on the exchange on which it's traded.An option is a wasting asset- the closer it approaches its expiration date, the lower is its"time value."Click Here For Goodies
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