In finance, an option is a derivative that gives the owner the right but not the obligation to buy or sell an underling asset at a specific strike price. In other words, an option is a type of insurance that ends at a specific time, and which also insures the price of your stock.
There are two types of options-- put and call options. The buyer of a call option has the right to buy shares at an agreed on price before the expiry date. On the other hand, a put option gives you the right to sell shares at an agreed price. The writer of an option gets a premium for every option he or she writes. One option gives you the right to buy or sell one hundred shares.
History of Options
The most reported financial instruments that investors mostly use are stock options and futures. Many traders wake up in the morning to have a glance at the stock futures to get a sense of where the market will open relative to the previous day's close.
One might assume these futures contracts or options markets are another sophisticated financial instrument that Wall Street specialists created for their own disingenuous purposes, but in fact, options and futures contracts did not originate on Wall Street at all. These instruments trace their roots back thousands of years - long before they began officially trading in 1973. (Abrahm, 2010)
Simple comparison put, call and common stock
Buying Common Stock Call Option Put Option
Ownership Forever Agreed upon time Agreed upon time
Price Price of the stock A small % of the stock price A small % of the stock price
Dividends Its up to the company No dividends No dividends
Liquidity High Low low
Table 1 (Simple Comaprison of put, call and C/S)
A call option gives you the right to buy a stock from the investor who sold you the call option at a specific price on or before a specified date. (Hansen, 2006) For the purpose of this report we bought options and shares for three different companies.