5.1. Simple Options: Puts and Calls
|
Basic Option Characteristics |
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|
Option |
Side |
Investing Entity |
Rights/Obligations |
Preferred Price |
|
Call |
Long |
holder/buyer |
right to buy |
↑ (bullish) |
|
Call |
Short |
writer/seller |
obligation to sell |
↓ (bearish) |
|
Put |
Long |
holder/buyer |
right to sell |
↓ (bearish) |
|
Put |
Short |
writer/seller |
obligation to buy |
↑ (bullish) |
Imagine that Google is currently trading at $500 and you believe that Google stock is going to rise quickly in the near term. Maybe you think it will climb to $550 within the month. You would like to buy shares in Google and profit from your belief that the price will rise, but you don’t want to commit to the whole price of the stock at this time.
Instead of buying shares of the stock, you could buy a Google call option, which will give you the right to buy a set number of shares in the future at a specific price. This price is called the strike price.
This call option will give you the right to buy 100 Google shares at the strike price, regardless of how high the market price of Google rises. Options don’t last forever, however; they usually only last for a few months. What happens if Google stock doesn’t go up as you expected? Then the opti