Understand the difference between puts and calls Learn the rights and obligations of buying and selling call and put options Understand the risk and reward profiles of long and short call and put options positions Options give traders, well, options. Investors can use options to manage risk and to try to potentially increase returns.
- Consider exploring a covered call options trade.
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Options are typically used to speculate on the direction of the market, hedge against market downturns, or pursue an additional income goal. This is why many active traders add them to their arsenals.
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First, the basics. There are two types of options: puts and calls. What Are Puts and Calls? So if you buy a call option, you have the right to buy the underlying stock or index.
If you sell a call option, you assume the obligation to supply the underlying asset when and if the call contract is exercised more on this later. So, what is a put?
A put option gives you the right to sell the underlying stock or index. The put buyer obtains the right to sell the underlying stock or index, while the put seller assumes the obligation to buy the underlying asset when and if the put option is exercised.
This gives you the potential to profit or lose if the stock makes a move. On the thinkorswim platform, from the Analyze or Trade tab, you can look at the option chains for different options contracts and identify the strike prices and cost of each. Buying a call option is kind of like buying a coupon for a dinner at half the price.
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The coupon is now worth more than you paid for it. This opens up some choices for you.
Do you keep it or sell it? Will you have an opportunity to redeem it on your own?
What Are Puts and Calls?
Your coupon is now worthless, because the price of the dinner on the open market is lower than the price you paid for the coupon.
Like the dinner coupon, an options contract derives its value from the underlying instrument.
But a call option depreciates in value as time passes. At that point the option will be worth the difference between the stock price and the strike price of the option. Your call option may have some value what an option looks like the stock price is higher than the strike price of the call, or it may be worthless if the stock price is at or below the strike price.
Selling a Call.