Options are "derivative investments", meaning the price movements of the investments are based on the price movements of another financial product. The financial product from which the derivative is obtained is called the "underlying."
Options are contracts that provide the buyer the right to buy or sell an underlying asset, at a predetermined price and before a specific date.
Here, the strike price is that at which a put buyer can sell the underlying asset. For example, the investor who chooses to go for a stock put option with a strike price of $10 can use the option to sell that stock at $10.
The Buyer Gets
The call buyer can buy a stock at the strike price before the expiration. To get the right, the call buyer needs to pay a premium. If the underlying’s price moves above the strike price, the option will be worth money. The buyer can sell the option for a profit or exercise the option, which means he would receive the shares from the person who wrote the option).
The Call Seller Gets
The call writer/seller which is usually a bank receives the premium. Writing call options is a way to generate income. However, the income from a call option is limited to the premium, but a call buyer has theoretically unlimited potential of earning profit.
Calculating the Call Option's Cost
One stock call option contract usually contains 100 shares of the underlying stock where each stock's call prices are basically quoted as per share rate. Therefore, to determine the price of a contract, the price of the option should be multiplied by 100.
Call options can be "in", "at", or "out of" the money −
Here, the strike price is that at which a put buyer can sell the underlying asset. For example, the investor who chooses to go for a stock put option with a strike price of $10 can use the option to sell that stock at $10.
The Put Buyer Gets
The put buyer gets the right to sell a stock at the strike price. For gaining that right, the put buyer needs to pay a premium. When the underlying’s price moves below the strike price, the option will be worth money. The buyer can also sell the options for a profit or exercise the option, that is sell the shares.
The Put Seller Gets
The put seller, or writer, gets the premium from the sale. Writing put options is also a way to generate income. However, generating income from writing put options is limited to the premium, while a put buyer can continue to maximize their profit until the stock price goes to zero.
Calculating the Put Option's Cost
Put contracts also represent 100 shares of the underlying stock. To find the price of the whole contract, one needs to multiply the underlying's share price by 100.
Put options can be "in", "at", or "out of" the money, just like call options −