Saturday, September 23rd, 2017

What Are Calls and Puts?

 

What are calls and puts in options trading? Calls and puts are the names for the types of contracts used to buy and sell stock, commodity, and futures options. The answer to “What are calls and puts?” depends also, to a degree, upon the point of view of the trader. Calls and puts are kinds of options trading that can offer a high degree of leverage to the investor (buying) or the prospect of continuing long term profits in the hands of skilled traders (selling). The options trader looks to buy options which have a low premium (price) and for which the trader believes the underlying equity price will rise (call) or fall (put). When there is a moderate to substantial move in equity price the trader will earn a substantially larger return on his investment than if he had bought the equity or sold short.

Over the long term options writing (selling) tends to be more profitable than buying. However, because of the risk of occasional substantial loss writing options is largely the province of large institution investors with the financial reserves to absorb that occasional loss. What are calls and puts for the professional making a living trading options? They are a means of making a living by anticipating whether a stock price will rise, fall, or stay the same. The options seller looks for equities that are unlikely to go up in price (calls) or down in price (puts).

A call contract gives the buyer the option to purchase the underlying equity which he will do if the equity price moves in the direction anticipated. A call contract confers an obligation on the seller (writer) of the call option to sell the underlying equity if the buyer executes the contract. Similarly a put contract gives the buyer the option to sell the underlying equity which he will do if the equity price moves in the direction anticipated. A put contract confers an obligation on the seller (writer) of the put option to buy the underlying equity if the buyer executes the contract. Covered options trading is when the seller of a call option or buyer of a put option owns the equity in question.

What are calls and puts to buyers versus sellers of options? Buyers of both calls and puts typically engage in uncovered options trading, also known as naked options trading. Because the premium paid for the option is typically a small fraction of the price of the equity, the buyer may gain a multiple of his investment when the equity price moves. Because the options buyer will only execute the contract when doing so is profitable the maximum loss he can incur will be the premium paid for the contract. He does not need to have any collateral in case of a larger loss. On the other hand the seller of a call may well own the stock or other equity in question. Thus he will simply forego the profit if the price of the equity goes up and the buyer executes the contract but will not need to buy the stock at the higher price in order to sell it to the options buyer. What are calls and puts to the owner of an equity? In the case of selling calls it can be an extra source income when the stock price does not go up, a payment for selling a stock whose price has risen, or a means of offsetting loss if the price goes down.

More Resources

Related Educational Products:

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!