Definition
An option holder is an individual or an entity that has purchased either a call option or a put option but has not yet exercised or sold the option. In options trading, the purchaser of the option holds the right, but not the obligation, to either buy (in the case of a call option) or sell (in the case of a put option) the underlying security at a specified price (the strike price) before or on a certain date (the expiration date).
Call Option Holder
A call option holder benefits if the price of the underlying asset increases above the strike price before the option expires because they can buy the asset at a lower price than the market.
Put Option Holder
A put option holder benefits if the price of the underlying asset decreases below the strike price before the option expires because they can sell the asset at a higher price than the market.
Examples
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Call Option Holder Example: Jane buys a call option for stock XYZ with a strike price of $100 and an expiration date of three months. In the next month, the price of stock XYZ rises to $120. Jane can exercise her option to purchase the stock at $100 and potentially sell it in the market for $120, realizing a profit.
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Put Option Holder Example: John buys a put option for stock ABC with a strike price of $150 and an expiration date of two months. By the end of the first month, the price of stock ABC falls to $130. John can exercise his option to sell the stock at $150, despite its market price being $130, securing a profit from the transaction.
Frequently Asked Questions (FAQs)
What is the main difference between a call option and a put option?
- A call option gives the holder the right to buy the underlying asset at the strike price, while a put option gives the holder the right to sell the underlying asset at the strike price.
How can an option holder profit from their position?
- A call option holder profits when the underlying asset’s price rises above the strike price. A put option holder profits when the underlying asset’s price falls below the strike price.
What happens if an option is not exercised by the expiration date?
- If an option is not exercised by the expiration date, it expires worthless. The option holder loses the premium paid to purchase the option.
Can option holders lose money?
- Yes, option holders can lose the premium paid for the option if it expires worthless (i.e., if the strike price is not favorable compared to the market price of the underlying asset).
What is the strike price?
- The strike price is the price at which the option holder can buy (call) or sell (put) the underlying asset.
Related Terms
- Options Contract: A contract that grants the holder the right, but not the obligation, to buy or sell an underlying asset at a set price.
- Premium: The price paid by the option holder to the option writer for the rights conferred by the option.
- Strike Price: The specified price at which the underlying asset may be bought or sold by the option holder.
- Expiration Date: The date by which the option must be exercised, or it becomes worthless.
- Intrinsic Value: The difference between the underlying asset price and the strike price if the option is in the money.
- Time Value: The part of the option premium attributable to the amount of time remaining until the expiration date.
Online Resources
Suggested Books for Further Studies
- “Options as a Strategic Investment” by Lawrence G. McMillan
- “The Options Playbook” by Brian Overby
- “Option Volatility and Pricing: Advanced Trading Strategies and Techniques” by Sheldon Natenberg
Fundamentals of Option Holder: Finance Basics Quiz
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