1. Call options
Definition: A call option is actually the right to own something in the future.
In the Hong Kong real estate market, there used to be a term called off-the-plan properties. The issuer of the off-plan property is often a real estate developer, and they sell the product of the off-plan property to the customer, stipulating that the buyer of the off-plan only needs to pay a deposit, such as 100,000, to lock in the house at a certain time in the future (such as a year later), such as 3 million).
Let's imagine, if the ** of this house rises to 3.5 million after a year, the buyer of the pre-sale will exercise the right to still buy the house at 3 million, which is cost-effective for the buyer. If the ** of this house falls to 2 million after a year, the buyer of the pre-sale will not exercise the option, because almost no one will be willing to buy a house with a market price of only 2 million at the market price of 3 million. However, it should be noted that even if the off-plan buyer does not buy the house, the deposit of 100,000 yuan will not be returned. This is a real-life example of a call option, where a premium (in this case, $100,000) locks in the future ** price (in this case, $3,000,000).
Option sauce collated and released.
2. Put options
Definition: A put option is the right to sell something in the future.
There are also examples in reality. Sometimes the minimum purchase price of grain is announced to farmers, and this is a put option that is given to farmers for free.
For example, ** stipulates that wheat in the hands of farmers will be purchased at a unit price of 3 yuan per catty this year. Let's imagine that if the market demand for wheat is very strong after three months, and the market price reaches 5 yuan per catty, farmers will naturally sell wheat to customers in the market. However, if the market is down, the market price is less than $3 (e.g. $2.).5 yuan), then the farmer can sell the wheat to ** at the rate of 3 yuan, thus locking in the minimum selling price of 3 yuan per catty. This is a real-life example of a put option.
3. Summary
Through the above two examples, we have summarized a mantra to help you remember the basic role of call and put options, that is:
Enough options: lock in the ** price.
Put option: Locks in the ask price.
For the call option, in essence, the buyer is given a right to help the investor lock in the price, and the more it rises, the more valuable the call option is.
For the put option, it essentially gives the buyer a right to sell, helping the investor lock in the selling price of the put, and the more it falls, the more the put option is worth more.