An option holder buys a contract. It can be a contract to purchase or a contract to sell shares of a stock in the future.
That way, if the stock price drops to five dollars, the investor can exercise the option and sell the shares at ten dollars. The investor loses only the cost of the option contract. But the option has served as insurance against a loss.
This VOA Special English Economics Report was written by Mario Ritter. Read and listen to our reports at WWW.51VOA.COM. And to send us e-mail, write to . I'm Steve Ember.
What would have happened had the price of the stock gone up? Say it jumps to fifteen dollars. The option gives the holder the right to sell at ten, but now that is below the market price.
In this case the investor would not exercise the option. The contract expires and becomes worthless. But who cares? The stock is now worth fifty percent more than what it was.
So far we have heard about option holders. Option writers are the ones who sell the contracts on exchanges. The price paid is called a premium. It usually represents the difference between the strike price and the market price of the stock.
I'm Steve Ember with the VOA Special English Economics Report.
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