what does a put and call option mean?
- Thread starter alpina
- Start date
Does this help:
"A Call option enables an option buyer to set a maximum price (rate) at which to buy.
A Put option enables the buyer to set a minimum price at which to sell."
I assume a Put & call option would be both options together.
i'm no expert, but I found this explanation somewhere.
"A Call option enables an option buyer to set a maximum price (rate) at which to buy.
A Put option enables the buyer to set a minimum price at which to sell."
I assume a Put & call option would be both options together.
i'm no expert, but I found this explanation somewhere.
abc's definition sounds good,
I would say a buying a call option is the right to buy something at a fixed price - you see a nice house down the street for sale and tell the owner you want an option to buy it within two weeks for $400k - that is a call option.
A put option is the right to sell something for a fixed price - you are thinking about selling your house but aren't quite sure - so you buy a put option from a relative - in this scenario you have the ability to sell it to the person within the time specified - though they do not have the right to demand you sell it.
I would say a buying a call option is the right to buy something at a fixed price - you see a nice house down the street for sale and tell the owner you want an option to buy it within two weeks for $400k - that is a call option.
A put option is the right to sell something for a fixed price - you are thinking about selling your house but aren't quite sure - so you buy a put option from a relative - in this scenario you have the ability to sell it to the person within the time specified - though they do not have the right to demand you sell it.
Call and put options are quite common in the share market, but rarer in real estate.
In the share market, I can buy a call option for a share which I think will go up. Say, NAB is $31.50 today, and I think it will go up to $32.50. I could pay, say, 20c for the right, but not the obligation, to buy those shares at the end of next month for $32.00. I pay the 20c to the person who owns the shares.
If the share rises to $32.50 by the end of that month, the person who owns the shares must (if I ask) sell me the shares to me for $32.00. I can immediately sell those same shares for $32.50- so I make a profit of 30c (sell price less buy price less option price).
If the share does not rise above $32, the person who owns the shares keeps the 20c, and I lose my money.
A put works in the opposite way. If I think the market will go down, I can buy a put- and if the share has gone down to less than the "strike price", I make a profit. If it hasn't, I lose my premium.
In the share market, I can buy a call option for a share which I think will go up. Say, NAB is $31.50 today, and I think it will go up to $32.50. I could pay, say, 20c for the right, but not the obligation, to buy those shares at the end of next month for $32.00. I pay the 20c to the person who owns the shares.
If the share rises to $32.50 by the end of that month, the person who owns the shares must (if I ask) sell me the shares to me for $32.00. I can immediately sell those same shares for $32.50- so I make a profit of 30c (sell price less buy price less option price).
If the share does not rise above $32, the person who owns the shares keeps the 20c, and I lose my money.
A put works in the opposite way. If I think the market will go down, I can buy a put- and if the share has gone down to less than the "strike price", I make a profit. If it hasn't, I lose my premium.
There are always two parties in Calls or Puts. One is a seller another is a buyer.
If you are a buyer (i.e. you pay a premium for the privilege to have a right):
CALL – gives you a right but not an obligation to buy at agreed in advance price
PUT - gives you a right but not an obligation to sell at agreed in advance price
If you are a seller (i.e. you receive a premium for the risk of having an obligation):
CALL – gives you an obligation to sell at agreed in advance price
PUT - gives you an obligation to buy at agreed in advance price
If you are a buyer (i.e. you pay a premium for the privilege to have a right):
CALL – gives you a right but not an obligation to buy at agreed in advance price
PUT - gives you a right but not an obligation to sell at agreed in advance price
If you are a seller (i.e. you receive a premium for the risk of having an obligation):
CALL – gives you an obligation to sell at agreed in advance price
PUT - gives you an obligation to buy at agreed in advance price
I almost purchased an apartment off the plan using a 'put and call option' a couple of years ago. It gave me the option of buying the apartment at a discounted price on completion of construction (2 years). However if I changed my mind for whatever reason it allowed the developer to force me to buy it at the agreed price (eg- if the market dropped before then).
I think how it worked was if I decided not to buy it the developer could then sell it to someone else at a higher price (assuming 2 years of good capital growth). But it still gave him the certainty of a pre-sale enabling him to get the construction finance and he could always force me to buy it in the end if required.
The advantage for me was the discounted purchase price, the smaller holding deposit (option fee), and not having to pay stamp duty 12 months after signing a normal contract of sale which I would have otherwise been up for half way through construction.
But I didn't go ahead with it so I don't know the details.
I think how it worked was if I decided not to buy it the developer could then sell it to someone else at a higher price (assuming 2 years of good capital growth). But it still gave him the certainty of a pre-sale enabling him to get the construction finance and he could always force me to buy it in the end if required.
The advantage for me was the discounted purchase price, the smaller holding deposit (option fee), and not having to pay stamp duty 12 months after signing a normal contract of sale which I would have otherwise been up for half way through construction.
But I didn't go ahead with it so I don't know the details.
We just sold a couple of units on a Put & Call, so let me see if I can explain the steps (although I may have my puts and calls mixed up):
A purchaser agrees to buy a property with a P & C Option. The Option is attached to a normal Contract, and the purchaser and vendor sign the P & C as they would sign a normal contract. The P & C is exchanged.
When the vendor is ready to settle, he notifies the purchaser that he's ready to settle.
The purchaser then excersises his put option. Once this is done, he signs the normal contract, and then this is exchanged and proceeds to settlement.
If the purchaser does not excersise his Put option, the vendor excersises his call option which forces the purchaser to exchange contracts and proceed to settlement.
In the meantime, the purchaser tries to resell the property. On settlement, if the property has been re-sold to a 3rd party, the vendor settles with the 3rd party, not the original purchaser.
It's normally done when someone buys something off the plan with the view to re-sell. There used to be a loophole whereby if you purchased in this manner you could resell and not be hit with stamp duty.
As others have stated, it's a common technique used when dealing with the share market that has also been applied to property, although not as common in property.
I hope i got it right, and it helps.
A purchaser agrees to buy a property with a P & C Option. The Option is attached to a normal Contract, and the purchaser and vendor sign the P & C as they would sign a normal contract. The P & C is exchanged.
When the vendor is ready to settle, he notifies the purchaser that he's ready to settle.
The purchaser then excersises his put option. Once this is done, he signs the normal contract, and then this is exchanged and proceeds to settlement.
If the purchaser does not excersise his Put option, the vendor excersises his call option which forces the purchaser to exchange contracts and proceed to settlement.
In the meantime, the purchaser tries to resell the property. On settlement, if the property has been re-sold to a 3rd party, the vendor settles with the 3rd party, not the original purchaser.
It's normally done when someone buys something off the plan with the view to re-sell. There used to be a loophole whereby if you purchased in this manner you could resell and not be hit with stamp duty.
As others have stated, it's a common technique used when dealing with the share market that has also been applied to property, although not as common in property.
I hope i got it right, and it helps.
