All About Stock Trading Option Agreements

In the world of finance, a stock trading option is a legal contract that grants the owner, the buyer, the exclusive right, but not the responsibility, to purchase or sell an underlying instrument or stock at a certain strike price and date within a defined period before or on a given date, according to the type of the stock trading option.

Such options are generally exercised by the buyer at the pre-determined price on or before the expiry day. They can either be an “out” option or an “in” option. Put options give the buyer the right as well as the power to purchase or sell the underlying stocks at the pre-determined price, but the buyer remains liable for payment even if he decides to exercise the option in the latter half of the period.

On the other hand, in an in option, a buyer has no right or power to purchase or sell the underlying securities until the expiry date. The price of the options are determined by a number of factors such as the strike price, whether the option is an “out” or an “in” option, and the premium paid by the buyer to the option broker. Furthermore, whether the options are call or put options, whether the prices are open or closed, and lastly, what is the strike price that determines when the options are exercised and at what price is considered a fair value of the securities.

Call options allow the buyer to acquire rights to the underlying securities at a specific time. A call option will be of a less quantity than a put option. Conversely, a put option will give the buyer the right but not the power to sell the securities underlying at the pre-determined price.

A call option becomes a valid option for the sale or purchase of a particular security at the expiry date if the buyer has paid the premium and the option has not been exercised by the seller within the time period specified by the contract. For instance, if the buyer wants to purchase stock from a listed firm at a fixed price, and if the firm has not yet entered into a market deal with the buyer, then the buyer can exercise the option before the expiry date.

Similarly, if the buyer wants to sell his or her stock to the same firm at a certain price, then the buyer has to exercise the option before the expiry date. A put option gives the buyer the right but not the power to sell the securities underlying at the pre-determined price before the expiry date. The call option gives the power to sell or buy the securities only within a specific time period after the expiry date.

Before exercising an option trading agreement, a buyer and a seller must decide on all the points mutually important to both the parties. For instance, it is necessary to discuss the position of the buyer and seller’s shares in respect of each particular share. The point of discussion is important because in stock option trading, if the buyer has decided to buy a particular share and the seller has decided to sell the same share, then the buyer will lose his or her whole investment if the vendor does not exercise the option within the prescribed time. Before investing, you can find more useful information from