put & call options

[Tal]

Guys
Ok,I understand "put" is the right to sell and "call" the right to buy but now i don't understand this :

A put option (sometimes simply called a "put") is a financial contract between two parties, the seller (writer) and the buyer of the option.
The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.

[url]http://en.wikipedia.org/wiki/Put_option[/url]

Why is the buyer selling and the seller purchasing,i mean what are the buyer and a seller in this case?
Or maybe buyer is called so cuz he s buying the option(put) which then lets him sell?
So if you want to buy money through options then you should sell a "put" option first,is that how it goes?


Very confusing

[mneumann]

The buyer in the scenario is the buyer of the option. The seller is the writer of the option.

The buyer is selling shares at this predetermined (strike) price to the seller of the option.

The part the explanation skips is that the buyer first has to theoretically buy the shares on the open market.

So the buyer (of the option) buys the shares on the open market for current value and then sells the shares to the saller (of the option) at the strike price.

[JDav]

The important aspect of any option is that only one actor has the ability to cause the underlying transaction to occur. The actor is the option "holder" (what you are calling the "buyer"). The opposing party is the option "writer", and must go along with the underlying transaction if the holder chooses, regardless of potential loss.

With that in mind, the terminology of writer vs. holder is completely independent of what the underlying transaction might be, whether it be buying an asset (call) or selling (put) or anything else (trade, etc.) -- with the stipulation that "buy" and "sell" are from the standpoint of the option holder.

Hope that helps.

[wonderacle]

yes, put is confusing,
the buyer/holder of the put sells the asset, with right but not obligation
the seller/writer of the put buys the asset, with obligation if required but no right

[Tal]

oh i see.So the buyer actually buys the option to sell or buy and he has to right to do so but not obliged and the seller ,sells the option to buy or sell and he s obliged to buy or sell.Yea,this is why is good to have a textbook.

Thank you guys,you r all great!

Another question which might be stupid.
Does this buying/selling options cost money,or is it just an agreement which requires signatures?

EDIT:but then no writer/seller would risk to get obliged if does not make any profit,right?

[Elk]

Exactly. The writer of the option charges an option premium, to compensate for the risk they are taking in offering the option.

[wonderacle]

oh i see.So the buyer actually buys the option to sell or buy and he has to right to do so but not obliged and the seller ,sells the option to buy or sell and he s obliged to buy or sell.Yea,this is why is good to have a textbook.

Thank you guys,you r all great!

Another question which might be stupid.
Does this buying/selling options cost money,or is it just an agreement which requires signatures?

EDIT:but then no writer/seller would risk to get obliged if does not make any profit,right?

the buyer has to pay the premium for options,
if you were the writer and you were somehow "sure" the buyer would not exercise the option,
(or even if he/she exercise the option, the premium could still cover it)
you would make the deal

[Tal]

It s all clear now
Thank you all!