Question

How would you explain Call Options, Put Options, Covered Calls, Straddle, Spreads, and Collars to a friend with no background in finance?

Answer 1

call Option - call option is called a contract between the option holder and option writer to buy a contract. Under call option option holder has a right to buy or not to buy the underlying asset at expiry date.

Put option - It is a option in which option holder has a right to sell or not to sell a underlying assets on expiry date.

covered call - it is strategy in in which trader buy a stock then sells a call option of the same amount of the stock and wait to either the exercise or expire the option contract

Straddle - it is a option strategy which involves simualtaneously purchase and sell of call and put option of the stock at same price, and expiry.

Spreads - spread is a option strategy is which buying and selling of equal number of options of same underlying security but different strike prices or expiration dates take place.

collar - It is an option strategy in which collar position is created by purchasing an out-of-the-money put option while on other hand simultaneously writing an out-of-the-money call option