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Speculative activity is carried on stock exchanges through options trading. An option in the stock exchange terminology means
a right In an option deal, therefore, the right to buy or sell a certain security within a certain time and at a certain price is purchased from a dealer. It may be an option or right to purchase securities, when it will be known as a call option. If it is the right to sell securities, which is being secured, it may be called a put option. When the two options are combined and the party securing the option purchases a right either to purchase or to sell a certain number of securities at a certain price up to an agreed date in the future, it may be referred to as a double option, or a put and call option.
When a speculator expects the price of a security to rise in the future, he may obtain or purchase a call option. In this way, he will be able to purchase the security at a lower price and sell it at a higher price, which may be ruling in the market at a future date. If, however, the price does not rise according to his expectation, he may not exercise his right or option to purchase or sell securities. Similarly, a put option is usually secured by those who expect a fall in the share price. For securing such a right, the speculator has to pay a premium to the party granting it.
The premium is known as the option money. If the option is not exercised, the speculator will lose only the option money. Thus the loss to the speculator will be limited to the amount of option money. Such dealings are, therefore, usually entered into by those who do not want to risk their capital, but at the same time want to take advantage of variations in price. A put and call option is, of course, in the nature of a gamble. The speculator may purchase or sell as he finds profitable at the next settlement.
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