What is Stock Option?
Options are just not limited to stocks only because options are used in many other markets like; real estate, bonds, indexes, etc. Now talking about stock option it is actually a legal contract that gives the contract owner the right to buy or sell stock of a specific quantity at a set price before a specific date.
Stock option is a legal contract therefore it is a standardized term and the nature and structure of stock option makes it possible to trade in these stocks just like we trade in real stocks. Stock option is a cause of market liquidity and has got the capability to bring buyers and sellers together as a group and hence, the whole trading process progresses in an efficient manner.
Stock option has got two varieties or we can say categories namely;
Call Option: under call option the owner has got the right to buy the stock at fixed price over a fixed period of time. He is given the ‘right’ but it isn’t obligatory so he can buy stock if he finds a margin of profit in it and if he doesn’t find the stock attractive he has got the right to not to buy it. On the other hand the seller of the stock is obligated to sell the stock if the owner or buyer wants to buy it. So, that’s why it is said call option because the buyer can call the stock away from the seller.
Put Option: put option gives the right to the owner to sell the stock at a fixed price over a specific period of time. It also gives the owner right but it is not an obligation; whereas the person selling the put option is obligated to buy the stock whenever the owner sells it. Therefore it is called put because the buyer can put the stock onto the seller.
Hence, stock option trading is a best way of getting marginal profits as stock option involves less requirement of funds but only if things go the way you planned them otherwise stock option is not for everyone because it is risky as time limit is attached to it.
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