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In the special language of options, contracts fall into two categories - Calls
and Puts. A Call represents the right of the holder to buy stock. A Put represents
the right of the holder to sell stock.
Call Options
A Call option is a contract that gives the buyer the right to buy 100 shares of an
underlying stock at a predetermined price (the strike price) for a preset period of
time. The seller of a Call option is obligated to sell the underlying security if the Call
buyer exercises his or her option to buy on or before the option expiration date. For
example, an American-style WXYZ Corporation May 60 Call entitles the buyer to purchase 100
shares of WXYZ Corporation common stock at $60 per share at any time prior to the option's
expiration date in May.
Put Options
A Put option is a contract that gives the buyer the right to sell 100 shares of an
underlying stock at a predetermined price for a preset time period. The seller of a Put
option is obligated to buy the underlying security if the Put buyer exercises his or her
option to sell on or before the option expiration date. Likewise, an American-style WXYZ
Corporation. May 60 Put entitles the buyer to sell 100 shares of WXYZ Corp. common stock
at $60 per share at any time prior to the option's expiration date in May.
The Expiration Process
At any given time, an option can be bought or sold with one of four expiration dates. This
is indicated by a month and year description. The expiration date is the last day an
option exists. For listed stock options, this is the Saturday following the third Friday
of the expiration month. Please note that this is the deadline by which brokerage firms
must submit exercise notices. You should ask your firm to explain its exercise procedures
including any deadline the firm may have for exercise instructions on the last trading day
before expiration.
Exercising the Option
Options traders don’t actually have to buy or sell the underlying shares that are
associated with their options. They can and often do simply opt to resell their options -
or "trade out of their options positions". If they do choose to purchase or sell
the underlying shares represented by their options, this is Called exercising the
option.
Option Types |
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Calls |
Puts |
| Buyers |
Right to buy stock if exercised |
Right to sell stock if exercised |
| Sellers |
Obligation to sell stock if
assigned |
Obligation to buy stock if assigned |
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This site discusses exchange-traded options issued by The
Options Clearing Corporation. No statement on this site is to be
construed as a recommendation to purchase or sell a security, or to
provide investment advice. Options involve risks and are not suitable
for all investors. Prior to buying or selling an option, a person must
receive a copy of Characteristics and Risks of Standardized Options.
Copies of this document are available from The American Stock Exchange,
86 Trinity Place, New York, NY 10006 or The Options Clearing
Corporation, 440 S. LaSalle Street, Suite 2400, Chicago, IL 60605.
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