Question

What is a put option? What is a call option? How do they differ? What does it mean for a call option to be In or Out of the Money? What does it mean for a put option to be In or Out of the Money? Look in WSJ or online and and find a current quote for a stock option. Write that down in this post and then explain what it means.

Answer 1

A put option is a right and not an obligation on the part of the put option holder to sell a particular security if the price of that security falls below the strike price. For example, the strike price is $15 and the stock price is $13 and the premium paid to buy the put option is $1, then the profit form the put option is $1 ( $15 - $13 - $1 = $1)

Put option holder profits if the stock price falls below the strike price.

In case of call options, the call option holder profits only if the stock price rises above the strike price. The investor who is purchasing the options need to pay a premium amount.

Call options and put option differ in the sense that, call option holder wants that the stock price rises and the put option holder wishes that the stock price falls. The call option holder bets that the stock price will rise and the put option holder bets on the falling prices of the stock.

When a call option is considered out of money then the stock price falls below the strike price. In such a case, the holder of the call option cannot exercise the option and the option gets expired worthless , the premium amount paid is a loss to the investor.

In case of put options,if the stock price is above the price then the option is considered out of the money and it expires without being exercised. Only if the stock price is below the strike price can the option be exercised and considered in the money option.

The current quote of a stock online is , Suppose stock Hanesbrands Inc (HBI), the strike price of a put option on this stock is $17. If the stock price is $20, then this put option is OUT OF MONEY. If the stock price is below $20, that is $15, then the put option is IN THE MONEY.