Stock options trading is getting famous day by day. Stock options offer numerous benefits and lucrative profits due to which many traders are exploring this new realm. Though it is thought to be easy but it is not. There are two types of stock trading and you should know about both of them in order to decide which one is good for you.
The knowledge about both the types ensures that you reap maximum benefits and also pass the volatile fluctuations in the market.
Stock options are of two types namely: Call Option and Put Option. Both of them gives certain rights and advantages to the trader. So, the following are some fundamentals about these two types and their benefits.
The contract under call options provides the buyer with a facility to buy the fundamental stock at a fixed price and in a certain time frame. This time frame can be before or on the expiry date of the underlying stock. The call option gives a right to the trader that he can purchase the shares at the strike price before the expiry date. The seller/writer has the obligation of the call.
The basic thing is that if at a certain price, the call buyer wants to purchase the fundamental stock, then the seller has to oblige and sell him the shares at pre determined price. He can’t refuse to do so.
The put option is contradictory to the call option. This allows selling of the stock unlike buying in the call option. A trader has the right to sell the fundamental stock at a pre determined price or strike price and subsequently a put seller has to oblige to sell the stock at strike price.
The put option allows the investors to safeguard their investments in case of a fluctuating market. If a market is dwindling, then an investor buys a put option of the stock at a fixed strike price and evades market uncertainty.
When market conditions improve then these investors can sell the stock at the same strike price they earlier paid for. The put option sellers have to oblige such a move and buy back the shares. If company under performed during the market downturn, then it can devastate a put seller. So, stock options are a two way sword
These were the differences between the two types of options trading. Now, that you know about the two types, you can make smart decisions about your investments. But before heading in to the murky waters, you should read the advantages and disadvantages of both the types.