Put And Call Options Explained
In simplest words, an option is the right but not an obligation to buy the underlying asset (e.g. stocks, bonds). There are two types of options – call or put. Lets discuss these further:
Call option –
When you purchase a call option contract you have the right to buy the asset at the strike price (a predetermined price) before the expiration. Unlike futures contracts you are not obligated to buy the asset and you can let the options contract expire. Of course, you will still lose the money you spent buying the contract.
So when would you buy a call option? You would buy calls when you were expecting prices to rise in the near future.
When the market price goes above the strike price, you are said to be ‘in the money’ because you would be able to profit if you were to sell the option contract immediately. However, if the market price is below the strike price, you are said to be ‘out of the money’. Put And Call Options Explained
Put option –
On the other hand if you buy a put option contract you have right to sell the asset at a predetermined price by the expiration date. This is similar to ‘shorting’ a stock in that you are expecting the price of a share of stock to go down in the value in the near term (sometime before expiration).
In the case of a put the inverse of a call holds. If the market price goes below the strike price then you are ‘in the money’ otherwise you are said to be ‘out of the money’.
Whether you choose to trade options using calls or puts, you need to do your homework. Trading options is risky and slightly more complicated than trading stocks. But, if you study the underlying asset, the volatility and other factors that affect its value you will be able to make better investment decisions. Not doing your research is a sure way to lose your shirt and then some. Put And Call Options Explained