Calls and Puts with Options or Stocks

The two types of contracts to buy or sell stocks are called calls and puts. A call option gives the holder the option or right to buy shares from the underlying company at a pre-established (strike price) before expiring. A put option gives the holder the option or right to sell shares of the underlying company at strike price before expiring. The option holder has then right to convert the contract at will.  It is not an obligation. In other words, the option holders can use their option when it’s advantageous for them.

There are 6 items of note in an options contract:

  1. Name of the company whose shares can be sold or bought.
  2. Number of shares that can be bought or sold, usually 100 shares per contract.
  3. The exercise or strike price which is the pre-arranged buy or sales price of the shares mentioned in the contract.
  4. Expiration date is that which determines when do periods of buy and sell expire.
  5. Agreement procedures
  6. Options exercise style

A s in any other contract, there are at least two groups: buyers and sellers. The option buyer is also referred to as the option holder, and the seller in the original contract is referred to as the option writer.

Procedures of the agreement are stipulated for stock options. They show when should the delivery of underlying stocks take place after the holder exercises the option.

There are two basic ways of exercise styles that determine when the option can be carried out. Options on individual stocks can be exercised any time before its expiration date (American style), while stock index options can be exercised only at expiration date (European style).

Expiration date is also important because it specifies the lifetime of the option. Expiration dates are standardized for option contracts listed in exchanges.

There are 3 cycles for listed option expiration, and each option is assigned one of the following cycles:

January cycle: January – April – July – October

February cycle: February – May – August – November

March cycle:  March – June – September – December

Beginner Money Investing How Options Work Calls and Puts with Options or Stocks