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How Do Puts & Calls Work in the Stock Market?

Posted By On 1/29/2010 09:32:00 PM Under

Well have you been looking to find an answer to the question as stated namely i.e. all of us want to know that how Puts & Calls Work in the Stock Market.

The point to remember is that price at which an option is exercised is called as “strike price.” For call options, if the underlying stock price is above the strike price, the option is said to be “in-the-money” or ITM. If the stock price is below the strike price, the option is “out-of-the-money” or OTM. “At-the-money,” ATM, occurs when the stock price equals the strike price of the option. Put options are ITM when the stock price is below the option strike price and OTM when above the strike price. The expiration date for options is the Saturday following the third Friday of the month. Regular options have expirations from one to nine months.

Using Options
An investor or trader can use options to make a short-term profit on the price movement of the underlying stocks. If he thinks the stock price will go up, he can buy or go along a call option on the stock. If he thinks the stock price will fall, buying or being long a put option will profit if the stock falls below the strike price. Options provide leverage on the underlying stock price, increasing the profit percentage if the stock moves in the correct direction.

At expiration, the holder of an ITM call option must purchase 100 shares of the underlying stock at the strike price. If she does not want to own the stock, the option should be sold before expiration. The holder of an ITM put option must have 100 shares of the stock to sell. Option holders can elect to exercise the option at anytime prior to expiration.

Thus make sure that one understand pros and cons of the market before venturing into this segment as options can take your money as it has a time decay element.
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