Q:

What are put and call options and what determines their value?

A:

Quick Answer

Call and put options are option derivatives that give the option holder either the right to purchase a call option, or sell a put option, or the underlying stock. Call and put options are priced according to their intrinsic value, the expiration date, interest rate and the underlying stock's price.

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Full Answer

A call option is a contract that awards the option holder with the right purchase 100 shares of the underlying stock at the predetermined strike price for an expressed period of time (expiration date). The seller of the call is required to sell the underlying stock if the call buyer exercises the option on or before the stated expiration date. If the underlying stock's price increases, the buyer realizes a profit when exercised because the stock is purchased at the strike price.

A put option is a contact that awards the option holder with the right to sell 100 shares of the underlying stock at the strike price on or before the expiration date. The seller of the put is obligated to purchase the underlying stock if the holder exercises the option on or before the expiration date. Therefore, if the underlying stock's price decreases, the buyer or option holder realizes a profit when exercised because the stock is sold at the higher strike price.

The primary factors that determine an option's price are the intrinsic value of the contract, the stock's current price, its volatility and the associated expiration date. An option's intrinsic value represents the value if the option were to be exercised today. It is expressed as the underlying stock's current price minus the call strike price for call options or minus the put strike price for put options.

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