Options are virtual stocks, where the shares are not bought or sold, but these are handed over from one hand to another hand through the contracts. It is trading the contracts and so virtually, trading the stock. Options are one way of going with trading with enough protection. You get to hear many times, like protection. You may hear somebody saying I am protecting my shares. Though there are many ways to go ahead with a trading of the stocks, options stand to be one of the significant and important methods of protecting your stock and playing your game safe.
There are two kinds of options in the stock market.
Type 1
One type of option is the call-up. If you take one call, it means that you have the legal right of buying 100 shares. The intention of making the call is that you are betting that the price of the stock is going to in the upward direction.
Let us take an example of a call. When you consider taking a call-up option, it means you are anticipating that the price of the stock is growing and will become better shortly. In such cases, you make a contract with the stockholder at the specific rate, which may be the same price at this point, or even a little higher than the cost of the stock that it has at present. So, also when the stock price has grown much beyond the price that you have contracted with the shareholder, you can still own those shares at the price you have contracted for. For example, the cost of the stock is at 70 dollars, and you are anticipating it to grow. Then you take a call-up option for 90 dollars. In the future, if the price increases to 150 dollars, you can still buy the stock at 90 dollars, which you have contracted for.
Type 2
Another kind of stock option is the pull. When you go for the put, it means you are betting that the price of the stock is going in the downward pattern. When you go with put, it means you will have the right, but you will not have an obligation to put the particular task to the others.
Let us consider an example. You want to trade the stock of a company. You see the price of the stock has been declining, from letting us say, 200 dollars. You may attempt to put that specific stock at say, 150 dollars. So, as you anticipated, if the price of the stock has still declined and went to 50 dollars, you are not going to lose at this point. It is because you have taken the option to put that is going to be declining, and you still have the right to sell off the stock at 150 dollars though the current price of the stock is 50 dollars. So, indirectly, you are buying the protection for your share, at the specific value of the price that does not move you towards the losses.