A call allows the option buyer to purchase the underlying stock; a put allows the buyer to sell the stock. The contract specifies the agreed-upon price and expiration date, explains the Motley Fool. Investors can sell or exercise these options, or they can expire.Continue Reading
For example, investor A owns IBM stock and writes a call option for IBM at 180. Investor B buys the option. If IBM goes over 180 before the expiration of the contract, investor B exercises the call option and investor A has to sell 100 shares at 180. If IBM's share price doesn't go over 180, the option will expire, states Forbes.
Investor C sells a put option on IBM with a strike price of 160. Investor D buys the option. If IBM's market price falls below 160, investor D sells 100 shares to investor C for 160. If investor D prefers not to sell the stock, he can sell the profitable option to another investor, notes Forbes.Learn more about Investing