Difference Call Option Put Option - Understanding Call and Put Options

Nov. 15, 2010 - PRLog -- Difference Call Option Put Option

Put and Call Options are a type of options contract. They are often confused with futures contracts, which is a dangerous mistake to make if you are a trader. This article will look into call and put options to see how they work, what profits can be made through them and what risks you must accept.

Options are one of the most flexible trading instruments on the market. The provide those that use them with high leverage, limiting the risk of trading considerably, if used wisely in tandem with futures and stocks. However the key is to learn and stick to a trading strategy that works.

A first step is to know the difference between a futures and options. Futures are legally binding contracts where those involved must either sell or buy whatever the agreement was. For instance if you buy a futures option of $100 in sugar and you do not sell the futures you will have actually bought $100 of sugar when the future matures.

Options work differently. When you buy an option you are buying the right, but not the obligation, to buy or sell a certain amount of stock at a specific price. If buy an option an option, whether to buy or sell, you are not obligated to do so, you just have the option. However, when you sell options (to buy or sell) you are forced to provide the service if the client assigns you to. Get Internet #1 - Difference Call Option Put Option @ http://slackers-trading3.blogspot.com and be Successful forever!

This can be a little confusing, so let us explain it a different way. Imagine you want to buy a house in a year. You have seen the house of your dreams but you still have not got you your finances together. However, you want to make sure nobody buys it before you do. In fact, you may think the price of the house will be higher in a year. So you offer the owner the value of the house plus a 10 percent on top of that. If they do not accept 10 they might accept 15 percent.

Once you agree on a price you pay a deposit to close the deal. Now you have the option of buying the house in a year for the agreed price. If you still have not arranged your capital by the end of the year, or no longer think it is a good deal, you are not forced to buy the house you can just lose the deposit.

However, if you have your money ready, the owner of the house has the obligation of selling the house at the agreed price. In this example the deposit is the option. You, the one that pays the deposit, are the trader that is buying an option, in this case a put option.

So a put option is simply an option to buy something in the future at a certain price. In the previous example, it would not have mattered if the price of the house had increase tenfold. The buyer had the right of buying it at the agreed price. Call Options on the other hand is the option to sell something at a set price it the future, no matter what the going price is in the future. Get Internet #1 - Difference Call Option Put Option @ http://slackers-trading3.blogspot.com and be Successful forever!

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