Calls and Puts – Lesson 2
April 4, 2010 by TraderX
Filed under Options Trading 101 - Tutorials
There are two main types of options contracts.
Calls and Puts.
A call gives the holder the option to buy an asset at a certain price within a specific period of time. Calls are just like having a long position on a stock. Buyers of calls hope that the price of the stock will increase before the option expiration date.
A put gives the holder the option to sell an asset at a certain price within a specific period of time. Puts are just like having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
Notice the use of “asset” above? The reason I didn’t use stock is because options aren’t always on stocks. You can also use options with indexes and other derivatives.
Don’t let the word derivatives scare you. A derivative is just the underlying asset that gives an option it’s value. A derivative could be a stock, an index, or any other underlying asset that can be traded on the options market.
For now just remember that calls are the option to buy and are entered when one thinks the underlying asset will increase in value.
Puts are the option to sell and are entered when one thinks the underlying asset will decrease in value.
The nice thing about options is you can combine calls and puts to profit regardless of which way the market moves.
Next we’ll look at trading options in a little more detail.
Until next time, happy trading!
Trader X
