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What Is a Put Option and a Call Option?


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What is a Put Option?

What Is A Put OptionIn order to understand what is a put option, it is necessary to clarify some basic information about options first. Options are a species of derivative; that often-vilified type of investment which some people hold responsible for the volatility of the present market. An option resembles a future because it involves the planned exchange of an underlying asset at a future date for a specific price. It differs from a future because the purchase of an option indicates the right, but not the obligation, to buy such goods under these conditions. You determine the price of an option by deriving it from the difference between the reference price and the actual value of the commodity or other asset involved.

 

What is a Call Option? What is a Put Option?

 

In American-style trading, there are two categories of options: the call option and the put option. When a trader believes that a stock price may increase, he may simply purchase the right to buy that stock for a certain price instead of buying the stock itself. He retains the right until a specific date. Prior to the arrival of that date, the market value may increase. He can then buy it at the guaranteed price and immediately resell at the higher market value in order to make a profit.

 The answer to what is a put option is essentially the reverse. In this situation, the trader already holds the stock. If he believes that the price will decrease in the future, he may buy the right to sell the stock at a pre-determined price. When the price decrease occurs, he can sell at the agreed-upon price and avoid loss. The advantage to knowing what is a put option is that the trader does not have sell but only retains the right to do so.

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