|
|||||||||||||||||||
|
|
|
Types of Options Call - Calls represent the option to purchase a security at a specific price (strike price) by a certain point in time. When purchasing an option, an investor's risk is limited to the premium (dollar amount) he pays for the option. When selling a call, the seller takes on the obligation to sell a specific amount of a security at a specific price if the option is exercised. This is also known as writing a call. In exchange for taking on this obligation, the investor receives a premium from the buyer of the option. If an investor sells calls and does not own the underlying security, he takes on a significant amount of risk since in theory his maximum loss is unlimited. The maximum profit when selling calls is the amount of the premium. Put - Puts represent the option to sell a security at a specific price at a certain point in time. Again, when purchasing a put option, the investor's risk is limited to the premium he pays for the option. Selling a put is taking on the obligation to purchase a specific amount of a security at a specific price if the option is exercised. This is also known as writing a put. The maximum profit in this situation is the amount of the premium. When selling puts, an investor is taking on a significant amount of risk, especially if he does not have the money to purchase the security. |
|
|
