First, you need to understand the basics behind an option. An option is a contract that gives a buyer a certain right. Options can be bought or sold. Even if you don’t own the stock, you can still trade options. It’s like a dealer selling a car first before that car is even in his inventory. He’s selling it to you before it’s even in the showroom, and then they custom make it and order it.
When people are just getting started, usually they’re going to focus on buying an option, which is basically a contract, a call or a put.
General option concepts.
When you purchase a call, you have the right, but not the obligation to buy the stock at the strike price. Meaning if you own a call contract, you can buy that stock at a cheaper rate. if that stock explodes to a million dollars, you can still buy it at the strike price, for example, $100, and then sell it for the current price.
When you purchase a put, you have the right but not the obligation to put that stock to someone else at the strike price. If you own a put contract at $40, and the stock price goes down to $1, you can put that stock to someone else at the $40 strike price, because that is the strike price that you own it at.
Option traders usually don’t deal with the stock. Meaning they don’t usually put the stock to someone else, or they don’t buy the stock from a call if it works out in their favor and then sell the stock back in the open market. Because doing that means three times the amount of trades and it’s unnecessary.
Instead what typically happens is, the contract’s value changes with time as that stock moves up or down, so they trade the option contract for more or less money.
If you’re buying a call, you want the stock to go up. If you’re buying a put, you want the stock prices to go down. If you’re a seller, it works in reverse. If you’re a seller of a call, you want prices to go down, and if you’re a seller of a put, you want prices to go up.
Buying a call or buying a put is generally the starting point for understanding the basics and fundamentals of options, even though that’s not necessarily what you always want to do.
Many professionals are sellers of options. They’re looking to sell puts or calls. However, there are some issues when you start looking at selling option contracts, because there is unlimited loss potential, so you need to be very careful. However, it can be very beneficial, if you understand and know what you’re doing.
#optionsbasics #callsputs #calloption #putoption #buyingputs #tradingoptions
Posted at: https://tradersfly.com/blog/ep-162-calls-vs-puts/
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