Options: calls & Puts

(5)Options: calls & Puts

A Call option represents the right (but not the requirement) to buy a set number of shares of stock at a pre-determined 'strike price' before the option reaches its expiration date. A call option is purchased in hopes that the underlying stock price will rise well above the strike price, at which point you may choose to exercise the option. Exercising a call option is the financial equivalent of simultaneously purchasing the shares at the strike price and immediately selling them at the now higher market price. A Put option represents the right (but not the requirement) to sell a set number of shares of stock (which you do not yet own) at a pre-determined 'strike price' before the option reaches its expiration date. A put option is purchased in hopes that the underlying stock price will drop well below the strike price, at which point you may choose to exercise the option.

Now if one is to buy a call option or put option than maximum risk is the total investment. The premium/price paid multiply by the quantity. But at the same time if a trader sell call/put option than risk is very difficult to predict. So it may involve lots of risk.

But Options and hedging is comparatively good idea to play with lesser risk but it needs

More exercise, study & analysis.