Commonly stock is transaction takes place in round lots. These round lots are blocks of stocks that can be divided by 100. Trading in round lot has become a standard trading practice. Round lot has also become standard unit of trade at the public exchanges.
We can buy and sell shares at the stock exchange. Usually there is no limit to the number of shares that we can buy or sell. Only thing needed is that there is someone, ready to sell at a price that we are ready to buy. Normally price is fixed by the seller. If transaction takes place through a brokerage firm there will be a commission for the transaction. Commission is normally for round lots. Even if you buy share in lesser quantity, you pay the same commission. Take an example, if you buy one round lot of share. Brokerage firm may charge $20 for the both buy and sell transactions. In case you buy only 10 shares even then, they will charge you $20 for the transaction.. The amount of commission that the brokerage firm normally charges for its stock transaction will differs from firm to firm. Some brokerage firm may charge less compared to others but they may require you to trade a lot in one transaction.
Transactions are mainly of two types namely call transaction and put transactions. Call option gives its owner the right to buy certain units of share at a specified price. This price is normally agreed upon between the call option owner and the seller. Most important transaction has to take place within a framework of time. Within this stipulated time period, stock price is linked to call option price.
The second type of option is put option. In this option owner has the right to sell certain units of share at an agreed upon price. Price of the deal is agreed upon between the put option owner and the seller. There is certain time frame to the deal. In this case also there is a link between stock price and option price. In case of put option these two are linked in the inverse way.
Which ever option you exercise, you can buy or sell shares so long there is some one ready to sell. Transaction of an option may involve four possible permutation and combinations. In the first case one is buying a call option means that one buys the right for buying certain units of share. In the second case of selling call option one can act as seller. In the third case one is buying a put option means that he can act as buyer of this option. In the last option one can act as seller in the put option.
Call options strategy and put options strategy represent the two approaches that try to use limitations of the method for maximum profit. Call option buyer benefits from the upward movement of the stock price where as put option buyer gains from the downward movement of the stock. On the other hand, a call option seller hopes that the stock price will maintain or fall. Put option seller, on the other hand hopes that the stock price will go up.
One can deal in any of the calls or puts option but they will gain benefit only if they correctly predict the price movement of the stock. For option, besides estimating the direction of the stock price movement you are limited the deadline of the option.
Tags: call option seller, call options, put options, upward movement of the stock price
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It is a nice basic article on options.