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AARP Getting Started in Options by Michael C. Thomsett

By Michael C. Thomsett

AARP electronic variants provide you with functional suggestions, confirmed ideas, and specialist tips.

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Sample text

Imagine that you buy a call option granting you the right to buy 100 shares at the price of $80 per share. Before the deadline, though, the stock’s market price rises to $95 per share. As the owner of a call option, you have the right to buy 100 shares at $80, or 15 points below the current market value. This is the purchaser’s advantage in the scenario described, when market value exceeds the fixed contractual price indicated in the call’s contract. In that instance, you as buyer would have the right to buy 100 shares 15 points below current market value.

Know your customer a rule requiring brokers to be aware of the risk, knowledge level, and capital profile of each client, designed to ensure that recommendations are suitable for each individual. prospectus a document designed to disclose all of the risk characteristics associated with a particular investment. How Call Selling Works Buying calls is similar to buying stock, at least regarding the sequence of events. You invest money and, after some time has passed, you make the decision to sell.

As more buyers want stocks, prices are driven upward by their demand; and as more sellers want to sell shares of stock, prices decline due to increased supply. The supply and demand for stocks, in turn, affect the market value of options. The option itself has no direct fundamental value or underlying financial reasons for rising or falling; its market value is a by-product of the fundamental and technical changes in the stock. Smart Investor Tip The market forces affecting the value of stocks in turn affect market values of options.

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