A widely adopted strategy by investors looking for short-term income is to write covered calls. Investors adopting a covered call strategy write calls while holding a long position in the stock. If you think that over the long run the stock price will continue to appreciate because it has strong fundamentals but that in the short run the price will depreciate, then by writing (selling) covered call options you can benefit from both scenarios.
Recall that options, as explained in our introductory article on stock options, is a contract between two parties that gives the option holder... more
A put option is a contract between two parties (buyer and seller) that enables the option holder (holder) to sell the underlying asset to the writer (seller) at a given price, known as the strike price or exercise price, within a defined timeframe. As for all equity option contracts, each contract refers to 100 shares of the underlying stock and the there are no ownership rights involved such as dividend payouts. If the put option is not exercised within the defined timeframe, it expires worthless.
As a put option holder you would exercise your right to sell the shares of the... more
A call option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a given price (strike price) within a defined timeframe. Because they derive their value from the underlying asset, which can be a stock, bond or other instruments, call options, just like put options, are known as derivatives.
If the call option is not exercised within the expiration date, it no longer carries any value. The expiration date of stock options is the last Friday of the option expiration month.
The price at which... more
All stock options, thus both call options and put options, have an expiration date. If the option holder does not exercise the right to buy or sell the underlying asset within such expiration date, the option becomes invalid will lose all its value. As such you would basically lose the premium you initially paid to purchase the option contract plus any commissions involved with the transaction through your broker. For an introduction to the world of stock options we suggest you first read our introductory article on stock options trading.
Unless an option... more
A stock option is a contract between two parties that gives the buyer (option holder) the right (but not the obligation) to buy or sell the underlying asset (in this case shares of a specific company) from the seller (known as option writer) at a given price and within a defined timeframe (at or before the expiration date, depending on the option style).
Stock options, just as all other types of options are also known as “derivatives”, as their values derive from the value of the underlying asset. The price at which the stock option is bought... more
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