Put and Call: Then and Now
Put and Call options - a bit of historical notes
Modern put and call options have roots stretching back into the times of an ancient Greece. One of the first references of using puts and calls is met in Aristotle’s work, where he described a successful example of speculation, made by another philosopher – Thales.
Thales wanted to prove that despite the poverty, a philosopher is capable of earning money with the help of “brain” (knowledge). Thales was really good at meteorology and suggested that, next summer olives harvest would be rich. Having some amount of money (which was pretty small),he leased/rented a special equipment for oil expression from its owners, who were not sure that their services would be in demand at that period of time. In such a way Thales bought a right to use this equipment in the future.
But in case if he didn’t want to use it, he could refuse having lost the paid for rent money. When summer came and the olives harvest turned out to be really rich, Thales got a chance to make money on providing lots of people the right to use the equipment.
What is a Modern Option?
Nowadays, in the 21st century, an option is understood as a right to either buy or sell a certain asset which is called –a basic asset in the future at a certain price. Options are a little bit similar to futures, with only one main exception – futures are like an obligation to make a trade within a bespoken period of time, whereas option – is a right. An option buyer can use a right to purchase or sell an asset and at the same time if he/she doesn’t want, he shouldn’t do it. That’s why comparing with futures, options are non linear instrument that lets stock traders realize their flexible strategies.
Similar to futures, call options as well as put options are traded on a stock. In the function of a basic asset, usually the same assets as for futures are used. Moreover, futures can be an option basic asset itself. Puts and Calls options have an expiration time. According to it, they are divided into American and European sessions. American session means that options can be exercised anytime before an expiration, whereas European session supposes options exercising only at this particular date.
Put and Call Options - How Does It Work?
Option can be of only two types: call option and put option respectively. Call option buyers, who are very often called “holders”, purchase the right to buy a basic asset in the future at a certain price, which is called strike. In its turn, Call option sellers, sell the right to a buyer at a certain price, which is called premium. If a buyer decides to realize his right, then the seller will have no choice but to offer him a basic asset at a bespoken in advance price, thus receiving the money in return. In case with a Put option, a holder, on the contrary gets the right to sell a basic asset in the future at a certain price and a seller gives such rights for money respectively. If a buyer decides to use his/her right, then a Put option seller will have to accept a basic asset from him/her and pay a bespoken cost for it. So, it appears that for the same basic asset with the same expiration, one can make four deals:
- buy a right to purchase an asset;
- sell a right to purchase an asset;
- buy a right to sell an asset;
- sell a right to sell an asset;
And now let’s have a look at a few examples that might give you practical ideas of how puts and calls work in real trading environment. Let’s imagine the situation where an investor wishes to make an option contract of a Put type for selling 100 shares at a price of $10 each within the next six months, considering the fact that the current price is $15. Buying an option, investor is hoping for shares price decrease within these six months, whereas a seller, on the contrary is hoping that the price will not get lower than at least $10. In this situation, a seller experiences more risks especially if the shares rate falls lower than $10, he will have to buy an asset at this price, though the effective price on the market can be lower. In its turn, option buyer’s profitability will be higher because he will buy cheaper shares on the marker and sell them at an advanced bespoken high price – and then second party will have to buy them in line with the signed contract.
What Role Do Call And Put Options Play or What Are They for?
Calls and Puts are used for making profits from speculative operations as well as risks hedging. They let investors limit the risks of possible financial losses by a certain amount of money that they pay for an option. At the same time, the profit can vary. This feature differs options from futures in a beneficial way and it doesn’t matter whether investor’s predictions come true or not – he has to make a deal according to the conditions in a bespoken day. Options – is a pretty risky way of investments, yet their advantage is in the idea that the risk is known in advance and therefore, a trader risks to lose only the money he paid for an option. Due to such a peculiarity, options are extremely popular among trades (who bring liquidity to the market) and investors receive a flexible instrument for building difficult trading strategies.
Conclusion: Call or Put?
When selecting a contract type, an important role is played by analysis. Before deciding upon the direction, it is necessary to try to predict it. For this, it is recommended to use technical analysis and all its additional instruments. Considering the fact that a trader who works with such contracts has enough time, he can also pay attention to not only indicators but also graphic patterns and candle types. One more thing that is needed is a strategy and a reliable system that would provide you with signals for basic assets. The point here, is that the strategy lets not only predict quotations but also teaches a trader to certain automatic actions and behavior. Finally, we can summarize that options have passed a way of hundreds years long. Having originated in a world that was so different from the current one, they have change and modified in order to be capable to solve modern investors’ and traders’ tasks. Now, thanks to flexibility and an opportunity to get desirable results, this particular financial instrument is on the pick of its popularity.