The trader pays $7,000 for the stock and can sell the new stock on the market for $11,000, making a profit of $4,000.
Call vs. Put / Seller vs. Buyer
As this paper has already stated, options one the ability, without an obligation, to engage in a security at a set price within a particular time period. With a call option, the buyer has the right, though is not required to buy at a set quantity of a commodity or a financial instrument from a seller by a particular expiration date for a certain price. On the other hand, a put option is the right to sell the underlying stock at a given strike price by a particular date. "The party that sells the option is called the writer of the option. The option holder pays the option writer a fee -- called the option price or premium. In exchange for this fee, the option writer is obligated to fulfill the terms of the contract should the option holder choose to exercise the option" (diffen.com).
When things are more volatile, the call premiums are larger, and are thus better for writing, because one earns more income when the volatility is high (Greg, 2011). With higher prices of options, investors are more fearful: "If someone has to pay a lot of money for an option above its intrinsic value, then the VIX is high. The general rule is that option premiums are high when the VIX is over 30" (Greg, 2011). On the other hand, a good time to purchase a put on a stock that one owns is when one has made a solid gain, but if one's level of certainty isn't that stable regarding the act of cashing out: puts can help in protecting against short-term volatility in long-term holdings (dummies, 2012). In the first example, one's put option helps to act as an insurance policy to help act defensively regarding one's gains. The latter example, if one's put goes up in value, one can sell it, decreasing the paper losses on one's stock: one can ultimately decide which put option to purchase by determining how much profit prospective one is okay with losing if the stock increases (dummies, 2012). Another term which is widely used is the term regarding "selling naked"; this is comparable to buying a call option, as it allows one to accrue more money when the underlying stock increases (dummies, 2012). Thus, this means that one is able to sell the put option without shortness in the stock and in the journey; one is able to hope that the stock stays at the same price or rises which will allow one to maintain the same premium (dummies, 2012).
Things to Consider
However, there are still things to consider when purchasing an options contract: "When you purchase an options contract, you pay a premium for the privilege that goes along with holding that contract; you're not paying for the full value of a stock. For instance, if you wanted to commit some of your investment capital to Google (GOOG), you'd be paying in the neighborhood of $625 a share. Buy 500 shares and that investment is the equivalent of a piece of real estate…" (Moon, 2012). While it's still possible to play the market in this fashion, it's not always the most ideal way as it can sometimes be very expensive. There's still a way to play Google and a range of other sticks with a much smaller initial investment along with a greater likelihood of getting return which can equal and sometimes even exceed what the average investor might experience. Options in this fashion can help to open the door to an even greater variety of equities and ETFs for capitalized investors that might not otherwise be able to have such expensive stocks in their portfolios (Moon, 2012).
Options Contract in the Stock Market
On the other hand, many argue that options contracts are crucial in helping to offer traders the opportunity to weigh their stock positions, allowing for a more leveraged position on a stock while mitigating the entire risk of the full purchase: in a likewise fashion, in real estate, such a contract can empower a buyer to gain a hold of options contracts on a range of parcels before having to execute the purchase on a single one, thus, making sure that the buyer will be able to put them all together before moving forward (IA, 2014).
Options Contract in the House Market
One can argue that when it comes to the house market, option selling is one of the most important customer services and profit...
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