investing market stock

The person who purchases the option has the right but not the obligation, to buy or sell a set number of shares, at a pre - determined price on or before a set date in the future.

As you can purchase the right to either buy or sell shares, there are thus two types of options, a Call option and a Put option. A Call option gives the owner the right to BUY shares, whereas a PUT option gives the owner the right to SELL shares.

For example, let’s say that you believe that XYZ limited shares are going to rise in value over the next month. They are currently trading at $1. 00 per share. You can either purchase 10, 000 shares right now, and invest $10, 000 or you could buy the right to purchase them at $1. 00, one month from now. For this right, you will pay premium. The premium you will pay will be approximately 4 cents per share. Therefore, you will invest $400 ( $0. 04 x 10, 000 ).