Understanding the difference between calls and puts and how they are traded is essential to fully grasping the art of options trading.
There are two types of options: call and put. A call option is when someone has bought the right to buy stocks from somebody else at a given price over a certain period of time – but only if it’s profitable for them. On the other hand, with put options, people invest in something that offers protection against anything going wrong with their investment (like dropping stock prices).
Although they can sound a little complicated at first, the strategy behind trading calls and puts is very simple. Let’s start with the definitions.
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).
Are puts riskier than calls? No puts are not riskier than calls. Puts are more expensive than calls, so you have to be willing to take on a greater risk. But generally volatility will increase as markets move lower, causing your puts to go up in value. So there’s not necessarily one investment that is riskier than the other; it all depends on how much of an upfront premium you’re prepared to pay.
Rather than trying to dive into every detail of exactly what those definitions mean, it is much easier to focus on the big picture.
If you are bullish on a stock and want to profit off of the rise in stock price, your options strategy would be to purchase, or go long, a call option.
If you are bearish on a stock and want to profit off of the fall in stock price, your options strategy would be to purchase, or go long, a put option.
Whether you decide to buy a call or a put, you’ll need to decide on the price of each options contract, the amount of contracts you want to buy, a strike price and an expiration date which can all be done via the options chain. These are the four most important aspects of an option trade and determine how much you’ll be risking, how fast you think the price of the stock will move and how much you think it will increase or decrease in price.
Now that you’re a little more familiar with the difference between calls and puts, we invite you to start placing a few trades on your own. Remember, always do as much research as you can before buying a call or put as they are volatile in nature and can change price very quickly throughout a given trading day.