Describe the reasons for writing and buying optins.
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Breaking Down Writing An Option
Breaking Down Writing An OptionWriting an option is a fundamental investment strategy dating back to ancient times in which an investor seeks to make money by correctly predicting future price movements in a stock or commodity. For example, a farmer growing corn may believe that current drought conditions will not persist into the next growing season, so he writes call options on the future price of corn. As the buyer of corn options, the farmer is granted the right to buy at a specified price in the future. This type of buy option is known as a call. The seller of an options contract must sell at the specified price, so in this case the farmer hopes to buy low and reap the rewards of the improved growing conditions for commodities once the drought ends.
Breaking Down Writing An OptionWriting an option is a fundamental investment strategy dating back to ancient times in which an investor seeks to make money by correctly predicting future price movements in a stock or commodity. For example, a farmer growing corn may believe that current drought conditions will not persist into the next growing season, so he writes call options on the future price of corn. As the buyer of corn options, the farmer is granted the right to buy at a specified price in the future. This type of buy option is known as a call. The seller of an options contract must sell at the specified price, so in this case the farmer hopes to buy low and reap the rewards of the improved growing conditions for commodities once the drought ends.Options contrac
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Purchasing a Put Option means that you are bearish about the market and hoping that the price of the underlying stock may go down. In order for you to make profit the price of the stock should go down from the strike price of the Put Option that you have purchased before or at the time of its expiration.
Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options.
If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best. We provide more information on selling and exercising options later.
One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down.
If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price. If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more.
If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position. To close a position by buying contracts you would place a buy to close order with your broker.
Buy-write is an options trading strategy where an investor buys an asset, usually a stock, and simultaneously writes (sells) a call option on that asset. ... Because the options position is covered by the underlying position, the downside risk of writing the option is minimized.
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