Stock Options Trading an Introduction to the Two Types of Options
What are Put and Call Options
There are two types of options they are called Calls and Puts. For a Call you are going to call the underlying instrument away from someone. The Call owner (buyer) has the right, but not the obligation to purchase an underlying security for a specified price by a certain expiration date. A put can be thought of as if you are putting it to somebody, so you are selling. The put option gives the owner (buyer) the right, but not the obligation to sell an underlying security for a specified price (strike price) by a certain expiration date. As you can see a person can both buy and sell calls and puts.
Potential Obligations for Call and Put Options
So as the writer or seller of either option you have the obligation to sell the underlying security for a specified price by a specified time if the buyer exercises his right. And a put is the same way if you are the writer or the seller of this particular put option you are potentially obligated to buy the underlying security at a specified price before a specified time, if the buyer exercises his rights to that option.
Rights for Call and Put Option contracts
Simply put buyers of options have rights that they can exercise and sellers of options have potential obligations. The fundamental reason the buyer has rights is because he has paid a premium to ensure those rights. The seller of the option has received money to hold the underlying security for the buyer. So when would you purchase call or sells?
You can think of it this way calls are usually purchased when it is believed that an underlying security will be going up in value. If you think that the stock price is going to go up then you would purchase a call option. And a put option would be bought if you believe the exact opposite that the underlying stock will be potentially going down in value. Now when you begin exploring strategies you will understand how it is possible to actually make money when the underlying security is losing value.
What does being long or short options mean?
When someone says they are long a call or short a put. The key thing to remember when you hear these terms is if you are in the long position then you are the buyer (owner) of the option. If you are short in a position then you are the seller (writer) of the option. When you are long a position it means you are the one who has rights, if you are short an option then you have a potential obligation. Notice you are only potentially obligated because if the buyer chooses not to exercise his rights by the time the options contract expires then you are not under any obligation.