Green Belt Test 2

 

 


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Just what is an option?

PUTS

Puts: A put contract gives the buyer the right but not the obligation to sell stock at a stated price. The seller of a Put has the obligation to buy the stock if the option is exercised.  The PUT buyer is usually protecting his downside, and the PUT seller is assuming the risk of buying the stock at a stated price.

An example would be APPLE is selling at $580 per share, the PUT buyer wants to protect his position against a downturn in the stock. For this reason he purchases a PUT that gives him the right to sell his APPLE  stock at $580.  You would be hedging your position against a downturn, however like homeowners insurance, no claim no return of any of your money. If APPLE does not retreat the money spent is 100% at risk.  LIke insurance you have a stated period of protection.

The PUT seller is assuming the risk that they will have to buy the stock at the stated price. IN this case the seller of the PUT hopes that APPLE will increase in price or stay above the $580 price. In this way the seller won’t have to buy the stock and they keep your funds. Look at this like the homeowners policy, no claims the insurance company does not return any of the money.

Stock Options

Stock Options: An option gives the buyer the right but not the obligation to buy/sell stock at a stated price within a certain period.

The U.S. uses American Options, these options can be exercised immediately after purchase and until expiration.