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Buying Options Investors can buy both call and put options when they think the underlying stock is going to go up or down. Rather than paying a price per share, as you would with regular common stock, the investor pays a premium for the option. The investor then has the opportunity to hold, exercise, or sell the option. If he or she chooses to hold the option without exercising it, it will expire worthless and the investor will have lost the amount of money that was paid for it. If the investor chooses to exercise the option, he or she will then either buy or sell the underlying stock at the set price, depending on whether it’s a call or put option. But, if the investor sells the option, he or she will either have a gain or a loss on the option. It will depend on whether the premium that the investor sold the option for was greater or less than the original premium. For example, if you pur- chased a call option for $300 and later sold it for $500, your gain would be $200, and vice versa.

Purchase call coptions for $300 Sell unexercised option for $500

Net gain (loss)


Selling Options Investors sell, or write, options for the opposite reason that they would purchase them. Usually, the investor has a position in the underlying stock and is looking to make a profit. The increased profit stems from the premium earned by the option writer for sell- ing the option. However, if the option is exercised, the option writer (and usually the stock owner) forfeits the opportunity to sell his or her shares of stock on the common market. Conversely, if the option sold was a put option, the option writer would then wind up paying a higher price for the stock than if it had been purchased on the stock market. The writer would still wind up profiting from selling the option because of the premium he or she would receive.

Those that write options don’t necessarily have to have a position in the underlying stock. “Naked options” are those in which the writer doesn’t own the underlying stock. They are highly speculative because if the option is exercised, the writer is then forced to cover his or her

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