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Put options allow you to sell shares at the strike price.
The effect of an increase in the price of the stock on a stock option depends on the type of option and on where the stock price is in relation to the strike price. Out of the Money Calls Suppose you purchase a call option and the market price of the underlying stock is less than the strike price.
This remains true as long as the stock price stays below the strike price. The only value the call option has is a premium the option contract seller, called the writer, charges to cover her costs.
In-the-Money Puts Put options work in reverse to call options.
A put option is in the money when the market price is less than the strike price. This is because you can buy the shares on the market and sell them to the option writer, who has to pay you the higher strike price.
In other words, when the stock price goes up, the price of a put option goes down.
- Easy and good earnings
- Options are financial contracts that give you the right, but not the obligation, to buy or sell a specific security at a set price, called the strike price, for a predetermined period.
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This means that, other than the premium, the option has no value and the price is close to nothing. The reason is simple: you would have to pay more options price decreases the shares than the strike price you would get by exercising the option to sell the shares.
Consequently, once the stock price rises to the strike price of a put option, the price of the option reaches zero and stays there unless the stock price drops below the strike price. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in Read More:.