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what are the contracts for/
- zman492Lv 78 months agoFavorite Answer
When you trade stocks you buy or sell shares of stock. When you trade options you buy or sell contracts. These contracts are typically traded on an exchange, just as stocks are. They are not "fidelity" contracts because the same contracts are traded by all brokerages.
Options are contracts between two parties. One party, known as the buyer or the holder, pays the other party, known as the seller or the writer, a sum of money, known as a premium, to create an options contract.
The contract gives the holder the right, but not the obligation, to complete a trade in the future with the writer. The writer has the obligation to complete the trade if the holder decides to exercise that right.
The contract specifies what security, known as the underlying, may be traded, the price at which it may be traded, known as the strike price, whether the trade is a buy or a sell, the quantity to be traded, and when it may be traded.
Options contracts are also known as "calls" if the contract gives the holder the right to buy the security and "puts" if the contract gives the holder the right to sell the security.
John owns 100 shares of XYZ stock which is currently trading $50 per share but does not expect the share price to increase very much in the next six months. John sells a call option contract expiring on the third Friday in April with a strike price of $55 for a premium of $2.00 per share. Mary thinks there is a good chance the price of XYZ stock will be well over $55 by April so she buys that call option. If Mary exercises the option she will buy John's shares for $5,500 and John will have to sell his shares for that price even if the stock is trading at $80 per share. If Mary does not exercise the option by the third Friday in April the contract will expire worthless. John keeps the $200 premium Mary paid to buy the option whether Mary exercised the option or not.
- Anonymous8 months ago
For exoctic transactions which often lead to losses for the masses. Avoid.
- A.J.Lv 78 months ago
An option is a contract to buy or sell shares at a specified price and expiration.
You can look up puts and calls. Buying shares and a put option to sell protects against large losses. Buying shares and selling a call limits your gain but makes the money of the call. You should research puts and calls and understand them fully if they interest you.