Two types of options


Since options are basically written contracts, it is separate from the stock market. However, options are worthless without an underlying asset that would support it. In the case of using options when trading stocks, the value of options rise and fall depending on the performance of its underlying stock.

Call
When investors think that a stock is going up in price, they could either purchase it directly and own shares or they can buy a call option. A call option is a written contract that
states at what price the stock can be bought and until when it is valid. The price of the stock has to go up in price in order for the call holder to have significant gains. If the price
does not go high enough to deliver profits for the trader before it expires, the amount paid for the call option will be lost.

Put
When the market is bearish and most stocks are falling, most traders resort to short selling. Shorting stocks involves borrowing shares and selling it right away and then buying them back at a much lower price. Traders who intend to short stocks can do so directly through a broker and sell borrowed shares or they can buy a put option. A put option is a written contract that states at what price the stock can be bought and until when it is valid. The price of the the underlying stock has to fall significantly in order for the put holder to have any gains. If the stock does not fall far enough to be profitable for the put holder, the amount paid for the put option is lost.


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