Puts and Calls
Puts and calls are two types of stock options. Like stocks they fluctuate in price and can be bought and sold. Put and call options represent contracts between the option buyer and the option seller concerning the purchase or sale of the underlying stock at a predetermined price and within a specific time frame. This predetermined price is termed the strike price. Each contract controls 100 shares of the underlying stock, making options a leveraged tool. There are certain rights and obligations associated with puts and calls. Also, they differ from stocks in the following important ways: the are valid only for a specific time frame, they are leveraged instruments, and their price movement can be volatile, that is it can vary more widely and sharply than the price of the underlying stock. Keep in mind that volatility, leverage, and specific time frame when coupled with the specific rights and obligations of options contracts can produce a fair degree of risk if used improperly. If this is your first experience trading options, I recommend that you begin by using the conservative strategies you will learn on this website for your extra income generation.
PUTS
A put is a contract that provides the buyer of the put with the right (but not the obligation) to sell 100 shares of the underlying stock at the strike price. The seller of a put is obligated to take ownership of 100 shares of the underlying stock at the option strike price if the put buyer decides to exercise his right associated with the option he bought (In which case the buyer “puts” the stock to the put seller). The seller receives an amount of money, called a premium, upon selling a put in payment for the obligation to take ownership of the underlying shares. Puts rise in value when the price of the underlying stock goes down. Puts decrease in value when the price of the underlying stock goes up. People who buy puts are either speculating that the price of the underlying will go down so they can sell the put for a higher price than they paid for it, or they are trying to insure the value of shares of the underlying stock they already own. Put sellers are trying to do one of two things, either acquire stock at a lower price than it currently has, or are trying to keep the premium by letting the option expire worthless at the end of the option’s lifetime. That’s exactly what we want to do...Keep the Premium!
CALLS A call is a contract that provides the buyer of the call with the right (but not the obligation) to buy 100 shares of the underlying stock at the strike price. The seller of a call is obligated to provide 100 shares of the underlying stock at the option strike price if the call buyer decides to exercise her right associated with the option she bought (In which case the buyer “calls” the stock to the call seller). Similarly to put selling, the call seller receives a premium upon selling a call in payment for the obligation to provide the underlying shares if “called” by the call buyer. Calls rise in value when the price of the underlying stock goes up. Calls decrease in value when the price of the underlying stock goes down. Many people who buy calls are speculating that the price of the underlying will go up so they can sell the call for a higher price than they paid for it. Call sellers are trying to do one of two things, either sell stock at a higher price than it currently has, or are trying to keep the premium by letting the option expire worthless at the end of the option’s lifetime. Again, that’s exactly what we want to do...Keep the Premium! We will cover several other aspects about options that you’ll need to understand before we proceed to the recommended strategies. You’ll need to become familiar with the concept of the
time decay
of the option price during the lifetime of the option. You’ll want to learn how to
read an options table
to determine which of the many options available might be most useful for your conservative income-generating program. And, because of the risks associated with the obligations of an option seller, you’ll want to develop an attitude that enables you to treat this endeavor as a business.
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