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Chapter 2. Option Basics > Calls and Call Strategies

Calls and Call Strategies

As a starting point in any discussion of option strategies, two matters have to be remembered. If you buy a call or a put option, you have the right to take certain actions in the future, but you do not have an obligation. Second, if you sell a call or a put, the premium you receive as part of an opening transaction is yours to keep, whether the option is later closed, expires, or is exercised. These two points are crucial in developing an understanding of how option trading works.

Options are contracts that grant specific rights to the buyer and impose specific obligations on the seller. If you think of options as intangible contractual rights (rather than as tangible items such as shares of stock, for example), the entire discussion of how to use options is easier. It may be worrisome for you as a conservative investor to consider trading in an intangible product, but when you relate it to other types of investments, you can appreciate both the logic and the need for options. For example, in a real estate lease-option, you have two parts: a lease specifying monthly rent and other terms, and an option. The option fixes the price of the property. If you decide to exercise that option before it expires, you can buy the property at the specified contractual price even if property values are significantly higher.


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