For put options, it is the converse, where the options holder may demand that the options seller
buy shares of the underlying stock at the strike price.
A call option gives its owner the right to
buy shares of the underlying stock at the strike price.
While not as common as call options (when the owner is reserving the right to
buy shares of an underlying stock), put options can be just as profitable.
But when you buy into a mutual - fund, the mutual - fund «suddenly has more shares» — it takes your money and uses it to
buy shares of the underlying stocks (in a ratio equal to its current holdings).
Not exact matches
If a
stock price is somehow chronically low in relation to the fundamentals
of the
underlying business,
buying 100 %
of the outstanding
shares removes the veil, and closes the gap between price and value.
When you sell a covered call, also known as writing a call, you already own
shares of the
underlying stock and you are selling someone the right, but not the obligation, to
buy that
stock at a set price until the option expires — and the price won't change no matter which way the market goes.1 If you didn't own the
stock, it would be known as a naked call — a much riskier proposition.
And because you're collecting immediate income, you're lowering your cost basis on the
shares you're
buying, which means this strategy is actually safer than purchasing
shares of the
underlying stock outright.
Listed
stock options contracts control the right to
buy or sell 100
shares of the
underlying stock.
For example, a trader anticipates that the
share price
of IBM is about to go up in the near future, he
buys the
stock futures
of IBM at the
underlying price.
So, if you exercise a call, you're
buying 100
shares of the
underlying stock; if you exercise a put, you are selling the
underlying 100
shares at a stated price — known as the «strike price.»
With ETFs, for example, following the dictates
of supply and demand, they
buy the component
stock to assemble new
shares, or dismantle
shares to sell the
underlying stock.
The seller
of a call option, also referred to as a writer, is obligated to sell the
shares of the
underlying stock at the strike price if a buyer decides to exercise the option to
buy the
stock.
And because you're collecting immediate income when you open the trade, you're lowering your cost basis on the
shares you're
buying, which means this strategy is actually safer than purchasing
shares of the
underlying stock outright.
Place a trade using your brokers option trading screen to
buy one
of the selected put options for each 100
shares of the
underlying stock you own.
If you
buy five contracts, you have the right to
buy 500
shares of the
underlying stock.
You must then
buy the 100
shares of the
underlying stock at the strike price.