On the other hand, let’s say it’s discovered that’s it’s not an antique at all, but a knock-off worth only $500. You have the right to exercise your option and buy it for $3,000, netting you a profit of $6,900 (minus transaction costs). After three months, you have the money and buy the clock at that price.īut maybe it’s discovered that the clock was owned by Theodore Roosevelt, which makes it worth $10,000. You talk to the owner and he agrees to sell it at that price in three months with a specific expiration date, but you have to pay $100 for him to agree to the contract. But you won’t have the cash for another three months. To make this clearer, let’s use a real world analogy… Let’s say you’re shopping for an antique grandfather clock and find the perfect one at the right price: $3,000. When the buyer of a long option exercises the contract, the seller of a short option is "assigned", and is obligated to act. An option that gives you the right to buy is called a “call,” whereas a contract that gives you the right to sell is called a "put." Conversely, a short option is a contract that obligates the seller to either buy or sell the underlying security at a specific price, through a specific date. There is no obligation to buy or sell in the contract, but simply the right to “exercise” the contract, if the buyer decides to do so.
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