In the financial world, a trading option is an agreement that grants the owner, the holder, either the right, or the authority, to purchase or sell an underlying instrument or asset at a given strike price within a defined period of time, according to the type of the option, before or on a certain date. It is also known as a put option, a call option, or a reverse option. It is commonly exercised by institutions, broker-dealers, hedge funds, and private individuals.
A fundamental option provides the owner with the right to purchase an underlying asset, and a call option gives the owner the right to sell an underlying asset. Trading options is done through stock market brokers or with electronic trading platforms. There are two types of options – a call option and a put option. A call option gives the buyer the right to purchase an asset, while a put option gives the buyer the power to sell an asset.
Since the two types of options carry equal risks, they are both valued at their strike prices. If an investor opts for the call option, he is required to pay the premium, which is generally a percentage of the total amount invested. The premium charged is based on the risk level of the underlying asset.
In a call option, this premium is paid on the total amount invested, irrespective of the actual sale of the underlying asset. However, if the buyer decides to purchase an asset, the seller may exercise his right to sell the same to the buyer before the expiry of the specified period. For instance, a holder of a call option may decide to sell the same before it reaches a specific price, thereby exiting the contract. Conversely, a holder of a put option can exercise his right to purchase the underlying asset at the specified price before it expires. Similarly, a naked call option gives the buyer the power to buy a particular asset without any obligation to the seller.
It has been noticed that most of the times, the premium is applied to the total amount and not the premium per option or per contract. Hence, when a home buyer decides to buy a property, he may purchase either the whole lot or a part of it, depending upon his requirements. Likewise, it has also been seen that a person purchasing a mobile phone would like to make the deal cheaper by signing up for a long-term plan rather than a weekend deal. In such cases, it has been seen that a person pays more premium in relation to the per contract value of the contract than he pays in case of buying the same number of units in a single call option.
When a person decides to buy a call option, it often becomes difficult for him to know its expiration date. Most of the times, investors fail to determine the expiration date because of the fact that they are not familiar with the method of calculation used in determining the market price of options. The reason for this is that the entire process involves calculation based on an assumption about the future market prices. Before investing, you can find more information from https://www.webull.com/quote/earnings .