Share Market

Stock options are more so a privilege sold from one party to another that gives the buyer, right to buy or sell a stock at a previously agreed price within a certain period of time. Here, the buy is also called call and the selling is called pull. They are the most creative, innovative and flexible financial derivative instrument that has ever been created.

Stock options are there in stock markets and in employee benefit schemes. This has been done to incorporate employee benefits in a company’s growth. Besides the stock futures, stock options have become an important derivative instrument since the early 70’s.

When a trader purchases stock options, the seller of the Stock Options is obligated to sell the underlying stocks at the price agreed in the Stock Options contract. Such Stock Options are known as Call Options. On the other hand, Stock Options which allows the trader to sell the current number of shares at an agreed price in the future are known as Put Options.

In detail, Call Options are Stock Options contracts allowing the trader to buy the stock in future at the current agreed price. The stock thereon rallies strongly and the call option becomes more valuable due to the fact that the trader is still able to buy it at a lower agreed price from the seller of the Stock Options. It is exactly like two people betting against each other. There are two cases- when the stock falls, the seller wins and gets to pocket the money the buyer paid for Stock Options and the other case where when stock rises, the seller is still obligated to buy the stock at a lower price losing money.

Quite conversely, Put Options are Stock Options contracts allowing the trader to sell current stocks in future at the current agreed price. The stock ditches and put option becomes more valuable due to the fact that the trader is still able to sell the stock at a higher agreed price to the seller of the put stock options. When the stock rises the trader can just let the put stock options expire, allowing the seller of the put options to pocket the money paid by the buyer for those stock options. In case the stock falls, the buyer of the put options can still sell the stocks to the seller at a higher price agreed. Thus in both cases when the stock rises and falls, in case of put options the seller does not lose money.