What are “Call Options” and “Put Options”? When should I buy them? October 15, 2006Posted by deminvest in Call options, dictionary for democratic investors, investment, investment strategies, Social investing, stock faq.
If you expect a rise of a stock, or of an index, you should buy a Call Option liked to it.
If you expect
a rise the fall of a stock, or of an index, you should buy a Put Option liked to it.
Expecting a rise? Buying a call option lets you buy a stock (actually 100 shares of a stock, but I’ll employ a per-share focus for simplicity) for a specified “strike” price. You win if the stock rises, but you lose if the stock stays flat or goes down. Fortunately, the most you lose is the price you paid for the option contract — typically a fraction of the stock price itself.
Expecting a decline? Buying a put option lets you “force” a counterparty to buy a stock from you (you don’t have to actually own it at the time you get into the contract). A decline lets you profit off a counterparty’s compulsory purchase of a now-depressed stock at its strike price. (Though included for explanation, the actual buying and selling legwork is unnecessary unless you hold until expiration and go through the exercise/assignment process.) Buying a put is the reverse of buying a call: You win if a stock declines but lose what you paid for the option should it stay flat or rise.