What is an options contract and how does it work?
Learn how investors buy and sell puts and calls to turn a high profit with options contracts.
Interested in learning more about options contracts? Explore these helpful tips below to take a deeper dive and learn all you need to know about how investors use these contracts to generate profit.
What is an options contract?
Investors use options contracts to buy and sell assets in the future at set prices to turn a profit. The agreed-upon date in the future is called an expiration date, and the set price is called the strike.
What are options contracts used for?
You can use an options contract to turn a profit and/or hedge the values of an investment you already own. However, because options contracts can be risky, use this type of contract for future real estate or stock values you can confidently predict. Learn how to write a detailed contract by understanding the different types and what they are used for.
Understanding the types of options contracts.
So, what is an options contract, and what forms can it take? Options contracts include two types: calls and puts. Both contracts let you buy and sell options to yield the highest profit before the expiration date.
Call options contract.
If you think prices will rise, use a call option contract. The buyer has the right to buy the number of shares specified in the contract at the strike price, but the buyer is not obligated to buy them.
Put options contract.
If you think future prices will fall, use a put option contract. The buyer has the right to sell the number of shares specified in the contract at the strike price, but the buyer isn’t obligated to do so.
Options contract example.
What does an options contract look like in real life? Let’s pretend that Company XYZ has shares trading at $50 each. If you think that the share price will rise in the next two months, you might purchase a call option for 50 shares at a strike price of $50 that expires in two months.
A month later, the shares have risen to a price of $75 each. Because of your call options contract, you could purchase 50 shares for $50 each, even though they are valued at $75 each. Then, you would turn around and sell them for $75 each, leaving you with a profit.
50 shares for $50 each = $2,500
50 shares for $75 each = $3,750
Total profit ($3,750 - $2,500) = $1,250
What’s the difference between future vs. options contracts?
Futures contracts and options contracts are similar because they both let you set prices in the present for things that can be bought and sold in the future. Both are used in hopes of turning a profit.
Their single biggest difference is that an options contract lets you buy or sell shares before the contract’s expiration date. A futures contract means you have to buy or sell on the expiration date.
Discover how to manage contracts and sign them along with other documents for your investments and explore everything you can do with Adobe Acrobat for business today.