Put and Call Options Explained

Puts and calls are contracts providing the owner with an option about delivery of an underlying security. However, put and call options are also bought and sold as investments independent of the underlying security named in the contract.

Holder or Writer

The holder of an option is the purchaser who owns the right conveyed by the contract. A decision to exercise the option belongs to the holder.

An option writer is the seller of the right conveyed by the contract.

Put or Call

A call option gives the holder a right to demand delivery of the underlying security. The writer of a call option is obligated to deliver the underlying security.

A put option provides the holder with a right to deliver the underlying security and demand payment. The put option writer is obligated to purchase the underlying security at the established price.

Exercise Price

Every put or call option contract specifies an exercise price—also known as the strike price. This is the price than the holder of a call option pays when exercising his right to demand delivery of the underlying security. The exercise price is what the holder of a put option receives when exercising the right to demand payment for his delivery of the underlying security.

Expiration Date

Each put or call option has an expiration date. After the expiration date, the option ceases to exist and no longer has any value. The rights of an option holder expire if he has not exercised them by the expiration date. (

Option Styles

There are three common styles of options that define when the holder may exercise his rights. American style options are exercisable at any time prior to the expiration date. European style options may only be exercised on the expiration date. Capped options are automatically exercised when the underlying security reaches the strike price.

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