Option Types: Calls & Puts
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.
|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|
A Call option is a contract that gives the buyer the right to buy 100 shares of an underlying equity 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 21, 2011 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 of May 21, 2011.
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 21, 2011 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 multiple expiration dates. This is indicated by a date description. The expiration date is the last day an option exists. For listed stock options, this is traditionally 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.
Certain options exist for and expire at the end of week, the end of a quarter or at other times. It is very important to understand when an option will expire, as the value of the option is directly related to its expiration.
Exercising the Option
Options investors 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.
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