Call vs put options trading

Option Types: Calls & Puts.

In the special language of options, contracts fall into two categories - Calls and Puts. A Call represents the right of the holder to buy stock. A Put represents the right of the holder to sell stock.

Option Types.

Call Options.

A Call option is a contract that gives the buyer the right to buy 100 shares of an underlying equity at a predetermined price (the strike price) for a preset period of time. The seller of a Call option is obligated to sell the underlying security if the Call buyer exercises his or her option to buy on or before the option expiration date. For example, an American-style WXYZ Corporation May 21, 2011 60 Call entitles the buyer to purchase 100 shares of WXYZ Corporation common stock at $60 per share at any time prior to the option's expiration date of May 21, 2011.

Put Options.

A Put option is a contract that gives the buyer the right to sell 100 shares of an underlying stock at a predetermined price for a preset time period. The seller of a Put option is obligated to buy the underlying security if the Put buyer exercises his or her option to sell on or before the option expiration date. Likewise, an American-style WXYZ Corporation May 21, 2011 60 Put entitles the buyer to sell 100 shares of WXYZ Corp. common stock at $60 per share at any time prior to the option's expiration date in May.

The Expiration Process.

At any given time, an option can be bought or sold with multiple expiration dates. This is indicated by a date description. The expiration date is the last day an option exists. For listed stock options, this is traditionally the Saturday following the third Friday of the expiration month. Please note that this is the deadline by which brokerage firms must submit exercise notices. You should ask your firm to explain its exercise procedures including any deadline the firm may have for exercise instructions on the last trading day before expiration.

Certain options exist for and expire at the end of week, the end of a quarter or at other times. It is very important to understand when an option will expire, as the value of the option is directly related to its expiration.

Exercising the Option.

Options investors don’t actually have to buy or sell the underlying shares that are associated with their options. They can and often do simply opt to resell their options - or "trade out of their options positions". If they do choose to purchase or sell the underlying shares represented by their options, this is called exercising the option.

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Call Option and Put Option Trading.

Put and Call Options: An Introduction.

Learn what call options are, what a put is, and how to make money with option trading. It's easy, if you understand the basics.

This introduction to calls and puts is written by an experienced trader and is full of tips that will help you make money trading options. It is full of examples showing actual trading wins (and a few losses) from trading.

Call option and put option trading is easier and can be more profitable than most people think. If you have never traded them before, then this website is designed for you. Not only is option trading easy to learn, but trading options should be part of every investor's strategy.

This introduction to puts and calls provides all the definitions, explanations, examples, and real-life trading tips needed to help the beginner trader learn to trade them successfully! If you keep reading you will learn the basic strategies to help maximize your gains and minimize you losses.

Long Call Example.

Trading Put and call options provides an excellent way to lock in profits, maximize gains on short terms stock movements, reduce overall portfolio risk, and provide additional income streams. Best of all, trading them can be profitable in bull markets, bear markets, and sideways markets. If you are trading stocks but you are not using protective puts, buying a call, or if you have never sold a covered call option, then you are not making as much money as you can and you are missing out on some nice profits. The recent volatility in the stock market has provided unusually profitable opportunities. While stock traders generally dislike volatility, option traders love volatility because it's easier to make profitable trades when the markets are moving up and down every day.

Once the average investor has reached a comfort level trading stocks, then he should begin learning about put and call options and how to trade them. Then, once he understands the basics and how to trade them successfully, then he should implement them in his regular trading and portfolio management strategy and watch his profits increase.

The beginning put and call option trader, however, often finds it difficult to transition from trading stocks to trading options because there is some new terminology and it requires a slightly different way to think about price movements. But trading them is easier than you might think--provided you start with learning the basics. This website is for exactly that: teaching you the basics.

Any successful trader should be implementing a strategy that includes both stocks and options. Why are put and call options important? Trading them is important because they allow you to make more money than trading just stocks! There is a time for trading stocks and there is a time for trading options. But most of the time you should be trading all three! Keep reading through this website to learn the top 10 things you need to know before your start trading.

Understanding put and call option trading is easy if you commit a little time to reading the following pages that describe in a very clear and concise manner the important definitions and concepts you must learn. This site provides lots of examples, and my personal tips. As an experienced stock investor, option trader, and a life-long educator, I created this website to introduce and explain my trading knowledge to the average investor.

If you don't have the basic understanding of options trading, however, it can also be very expensive. Because of the short life of an option, profits and losses can add up quickly. The typical stock investor that starts trading options usually does not have a good understanding of the forces at work, they lose money on their first few trades, and then they throw their hands up in the air and say "It's too confusing--never again." Keep reading so this doesn't happen to you!

Long Put Example.

It is like everything else--you must commit a little time to understand the basics. Then once you start understanding it you will make some money at it. And once you start making a little money at it, then you will start enjoying it and look forward to the stock market opening every morning.

I have already helped thousands of people understand what a option is and how to trade them. I have written this Introduction to Call and Put to help you learn what they are, and to show you how easy it is to trade them.

If you read sequentially through the links in the Table of Contents on the top right side of this page, in less than 60 minutes you will have a very clear understanding of:

I made my first call trade in 1985 and have been trading call & put options ever since. I have an MBA in Finance, I have read dozens of the best books, I have subscribed to several of the best newsletters, I have used many of the best discount brokers websites, and I have made thousands of trades in my lifetime.

Now, with this website, I am going to share with you all of my 29 years of experience trading call and put, of looking for the best, of knowing when to take profits and when to let them run, and unfortunately for me but good for you, I will also show you some of the biggest trade mistakes I made.

Getting Started Trading Options.

First of all, let's talk about what you need to start trading:

Read all the way through the Table of Contents on this web site Practice trading on a virtual trading platform Open a discount brokerage account, see my recommended list of best option brokers You don't need a lot of money, but you need at least $1,000 to get started You need to have an idea about the future direction of a stock or index You need to be able to do just a little bit of math.

If you can do these things, then you have what it takes to make your first trade.

Here are the top 10 option concepts you should understand before making your first real trade:

Options Resources and Links.

Options trade on the Chicago Board of Options Exchange and the prices are reported by the Option Pricing Reporting Authority (OPRA):

Call and Put Options, Definitions and Examples.

Descriptions of call and put options.

Definition of Call and Put Options:

Call and put options are derivative investments (their price movements are based on the price movements of another financial product, called the underlying). A call option is bought if the trader expects the price of the underlying to rise within a certain time frame. A put option is bought if the trader expects the price of the underlying to fall within a certain time frame.

Put and calls can also be sold or written, which generates income, but gives up certain rights to the buyer of the option.

Breaking Down the Call Option.

A Call is an options contract that gives the buyer the right to buy the underlying asset at the strike price at any time up to the expiration date (US style options).

The strike price is the price at which an option buyer can buy the underlying asset. For example, a stock call option with a strike price of 10 means the option buyer can use the option to buy that stock at $10 before the option expires.

Options expirations vary, and can have short-term or long-term expiries. It is only worthwhile for the call buyer to exercise their option, and force the call seller to give them the stock at the strike price, if the current price of the underlying is above the strike price. For example, if the stock is trading at $9 on the stock market, it is not worthwhile for the call option buyer to exercise their option to buy the stock at $10, because they can buy it for a lower price ($9) on the stock market.

The call buyer has the right to buy a stock at the strike price for a set amount of time. If the price of underlying moves above the strike price, the option will be worth money (has intrinsic value). The trader can sell the option for a profit (this is what most calls buyers do), or exercise the option at expiry (receive the shares).

For these rights the call buyer pays a "premium".

The call seller/writer of the option receives the premium. Writing call options is a way to generate income. The income from writing a call option is limited to the premium received though, while a call buyer has unlimited profit potential.

One call option represents 100 shares, or a specific amount of the underlying asset. Call prices are typically quoted per share. Therefore, to calculate how much buying a call option will cost, take the price of the option and multiply it by 100 (for stock options).

Call options can be In the Money, or Out of the Money. In the Money means the underlying asset price is above the call strike price. Out of the Money means the underlying asset price is below the call strike price. When you buy a call option you can buy it In, At, or Out of the money. At the money means the strike price and underlying asset price are the same. Your premium will be larger for an In the Money option (because it already has intrinsic value), while your premium will be lower for Out of the Money call options.

Breaking Down the Put Option.

A Put is an options contract that gives the buyer the right to sell the underlying asset at the strike price at any time up to the expiration date (US style options).

The strike price is the price at which an option buyer can sell the underlying asset. For example, a stock put option with a strike price of 10 means the put option buyer can use the option to sell that stock at $10 before the option expires.

It is only worthwhile for the put buyer to exercise their option, and force the put seller to give them the stock at the strike price, if the current price of the underlying is below the strike price. For example, if the stock is trading at $11 on the stock market, it is not worthwhile for the put option buyer to exercise their option to sell the stock at $10, because they can sell it for a higher price ($11) on the stock market.

The put buyer has the right to sell a stock at the strike price for a set amount of time. If the price of underlying moves below the strike price, the option will be worth money.

The trader can sell the option for a profit (what most put buyers do), or exercise the option at expiry (sell the physical shares). For these rights the put buyer pays a "premium".

The put seller/writer receives the premium. Writing put options is a way to generate income. The income from writing a put option is limited to the premium received though, while a put buyer's maximum profit potential occurs if the stock goes to zero.

One put option represents 100 shares, or a specific amount of the underlying asset. Put prices are typically quoted per share. Therefore, to calculate how much buying a put option will cost, take the price of the option and multiply it by 100 (for stock options).

Put options can be In the Money, or Out of the Money. In the Money means the underlying asset price is below the put strike price. Out of the Money means the underlying asset price is above the put strike price. When you buy a put option you can buy it In, At, or Out of the money. Your premium will be larger for an In the Money option (because it already has intrinsic value), while your premium will be lower for Out of the Money put options.

Other Things to Know About Puts and Calls.

The pricing of options is rather complex, because the price (premium) of the option is based on many factors, including how far in or out of the money it is, the volatility of the underlying asset and how far the option is from expiration. These option pricing inputs are called the 'Greeks', and they are worth studying before delving into options trading.

Know your options: The basics of puts and calls.

Options have becoming an increasingly important part of the financial markets, and they can be a powerful tool in many different situations. But how exactly do they work?

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To begin with the very basics, options are considered part of the more general group of financial instruments known as derivatives. That's because their value is derived from that of an underlying asset, such as a stock, an exchange-traded fund, or a futures contract.

Options come in two flavors—puts and calls. A call is the right to buy a stock for a given price within a given period of time, while a put is the right to sell a stock for a given price within a given period of time.

The price at which the option can be exercised — in other words, the price at which the stock may be bought or sold—is known as the strike price. And the time at which the option expires is known as the expiration date.

A trader may choose to either buy or sell an option, meaning that there are four basic trades: buying a call (generally a bullish strategy), selling a call (a neutral or bearish strategy), buying a put (a bearish strategy), or selling a put (a neutral or bullish strategy).

To put it all together, then: If a trader buys the March 100-strike call on stock ABC, that means he is paying for the right to buy shares of ABC between now and March expiration. (An American option can technically be exercised prior to expiration, though that would only be done in rare situations).

So how much will that right cost?

Well, an option's price is made up of two components: Intrinsic value and time value.

Intrinsic value is inherent in the price of an option—it is how much an option would be worth if it were exercised immediately. For instance, if ABC is trading at $105, then the 100-strike call has $5 worth of intrinsic value, and the 110-strike call has no intrinsic value. Conversely, the 110-put has $5 of intrinsic value, and the 100-put has $5 worth of intrinsic value.

But there's more to an option's price than its intrinsic value. An option also has time value (also known as extrinsic value) because there's always the chance that the stock moves more between now and its expiration date. The exact price of an option is set by demand in the market, and predicting the time value of an option is more than a bit tricky, but the main inputs are the time until expiration and the stock's volatility.

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