Stocks Covered Call
Stocks Covered Call
Stock Options Explained – Put Options and Their Use
If you are interested in options trading, and want to get stock options explained, you might find various interesting details about them at various places. They are a new mode of trading in the stock market with high ROI and low risks. But before diving into the actual trading, you need to know its basic elements in detail. Among two types of stock options, one is put option. As with other elements, you need to know about them in detail.
But before that, you need to clear the basic concept of stock option cleared. What actually are they? Stock options are contracts which give the owner of the contract the rights to buy or sell some stocks at some fixed price in a time period. The fixed price is called strike price and it is the price in which the actual stocks are traded later. Options have expiry dates after which the contract is invalid.
There are two types of stock options, one is call option, the right to buy the stocks, another is put option, the right to sell the stocks. Here, we are going to get the put type stock options explained in little more detail.
So, the put options are contracts which give the holder the right to sell the stocks. It also gives the seller of the options, also called the option writer the obligation to buy the stocks. This type of option is bought by a trader if they believe that the price of the stock will fall in the market. In that case, they sell the stocks at the strike price after the market price has fallen and the gain from the option is the difference between the strike price and the market price.
Put options also have two types. One is covered put, another is naked put. Covered put means put options in which the holder has the ownership of the underlying stocks. And naked put means contracts where the holder does not readily own the underlying stocks. Covered calls are simple. But naked puts are little complex so it requires an example to get the naked put stock options explained.
Say, person A buys naked put from person B for 100 stocks of XYZ company at a price of 2$ each. The option has a strike price of 50$ for each stock. Later, the price of the XYZ stocks fall to 40$, then person A buys 100 stocks from XYZ at 4000$ and sells them to person B at 5000$. So his total profit is (5000$-4000$)-200$=800$. But if the price does not fall, the total loss is equal to 200$ which is the price for the option.
To get elements of stock options explained at farther detail, it is advised to contact licensed consulting firms and brokers. They have experience and can provide with important knowledge and information.
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