ABC shares are trading at $60 and a call option writer wants to sell call options for $65 with a one-month expiration. If the share price remains below $65 and the options expire, the issuer of the call options holds the shares and may receive another premium by re-subscribing to call options. In general, call options can be bought as a leveraged bet on the appreciation of a stock or index, while put options are bought to take advantage of price drops. The purchaser of a call option has the right, but not the obligation, to purchase the number of shares listed in the contract at the strike price. If the stock price exceeds $65, which is considered in the currency, the buyer calls the seller`s shares and buys them for $65. The call option buyer can also sell the options if buying the shares is not the desired outcome. Options are usually used for hedging purposes, but can also be used for speculation. That said, options typically cost a fraction of what the underlying shares would cost. The use of options is a form of leverage that allows an investor to make a bet on a stock without having to buy or sell the shares directly. In a call option transaction, a position is opened when one or more contracts are purchased by the seller, also known as the writer.
In the transaction, the seller receives a premium for assuming the obligation to sell shares at strike price. If the seller holds the shares to be sold, this is called a covered call option. The terms of an options contract specify the underlying security, the price at which that security can be traded (strike price) and the expiry date of the contract. A standard contract includes 100 shares, but the share amount can be adjusted for stock splits, special dividends or mergers. The two types of contracts are put and call options, both of which can be bought to speculate on the direction of stocks or stock indices, or sold to generate income. For stock options, a single contract includes 100 shares of the underlying stock. An options contract is an agreement between two parties to facilitate a potential transaction of the underlying security at a predefined price called the strike price before the expiry date. Buy put options speculate on declines in the price of the stock or underlying index and have the right to sell shares at the strike price of the contract. If the share price falls below the strike price before expiration, the buyer can either sell shares at strike price to the seller for purchase, or sell the contract if the shares are not held in the portfolio. Put buyers have the right, but not the obligation, to sell shares at the strike price stated in the contract.
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