We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
Welcome to the world of options, and firstly you need to know both parties of options trading.
The option holder also called the buyer, is the party who has a long position in the option and owns the right inherent in the contract.
However, the right doesn't last forever, as at some point the option will expire. At expiration, the owner may exercise the right or, if the option has no value to the holder, let it expire without exercising it.
Owning an option represents strictly the right either to buy the stock or to sell it, depending on whether it's a call or a put. It means you can not own some of the shareholder ownership rights, such as receiving dividends and having voting rights.
The option writer also called the seller, is the party who has a short position and incurs an obligation to potentially either buy or sell the stock.
When a trader who is long an option exercises, a trader with a short position needs to fulfill its obligation that was established when the contract was sold.
Shorting an option is fundamentally different from shorting a stock. Shorting a stock must establishing a short position while in an option does not require borrowing.
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If there is anything that you didn't understand in today's Options Basics article, simply leave a comment below and we will try to explain more to you!