Rights And Obligations Of Stock Options

Whenever you trade stock options, it is important to understand what are the rights and obligations of stock options. Whether you are trading call options or put options, the rights that you have and the obligations that you incur are the same.

Let’s look at a quick example. Suppose I think that Amazon stock is going up. If Amazon is currently trading at $350, and I think it is going to go to $375 by next month, I could buy a Call option. I could buy an April 360 Call option. Buying this Call options gives me the right to buy 100 shares of AMZN any time before late April for $360 per share, regardless of the market price of AMZN. If AMZN goes to $400, and I have the right to buy stock at $360, I can potentially make $40/share instantly. However, if AMZN falls to $350, owning the right to buy stock at $360 is of little value at all.

Suppose I bought this April 360 Call option from you. You sold it to me. By selling a Call option, you incur an obligation. You have the obligation to sell 100 shares of AMZN to me for $360 per share any time before late April. If AMZN falls to $350 per share, you know that I’m not going to ask you to sell me stock for $360. The option would be worthless. However, if the stock rises to $375, I’m going to ask you for 100 shares at $360. You have the obligation to sell them to me. It would be nice if you already own the stock so that you don’t have to go buy the stock for $375 in order to fulfill your obligation to sell it to me for $360.

  • Whenever you buy a call option, you have a right to buy stock at a certain price before the option expires.
  • Whenever you sell a call option, you have the obligation to sell stock at a certain price before the option expires.
  • Whenever you buy a put option, you have the right to sell stock at a certain price before the option expires.
  • Whenever you sell a put option, you have the obligation to buy stock at a certain price before the option expires.

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