When you buy a call option, you are essentially betting that the price of the underlying common stock will rise, making the call option more valuable.
Conversely, put buyers are betting that the price of the underlying common stock will decline, making the put option more valuable.
Returns are only in the form of capital gains.
Since you do not own the stock but only the right, dividends paid on the underlying stock do not benefit you.
-----
The seller receives a fee called an option premium for selling you a call or put.
Once an option is created and the seller receives the premium from the buyer, it can be traded in the secondary market.
The premium is the market price of the derivative, and the price will fluctuate along with changes in the underlying common stock.
-----
Put and calls allow both buyers and sellers to speculate on the short-term movements of common stocks.
Buyers obtain an option on the common stock for a small, known premium.
This known premium is the maximum that the buyer can lose.
If the buyer is correct about the price movements of the common stock, capital gains are magnified because only a small investment is committed.
-----------
There are two particularly important types of derivatives - options and futures.
Many other types exist, but they can usually be created from these two basic building blocks, possibly by combining them with all sorts of other investment assets including stocka and bonds, stock indexes, gold and commodities such as wheat and corn.
Ref: Make your money work for you, by Keon Chee & Ben Fok
No comments:
Post a Comment