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| *Ostroff, Fair and Company>>>Investing |
Please , whats the difference between a put and a call option?...laymans terms? |
Please , whats the difference between a put and a call option?...laymans terms? I will over-simplify this (I hope you get the basics of options): 1. Purchasing put options contracts (AKA long put): -You purchase put options when you think the price of a stock is going to go down in the near future. ex. JetBlue (Nasdaq: JBLU) is trading at $10.20/share. You believe that the price of JBLU share will go down to $9.00 for some reason. You will buy one Put Options contract with $10.00 strike price. Next week, the price of JBLU share does go down to $9.00. You exercise the contract, which means: you sell your JBLU shares for $10.00 per share instead of the market price $9.00. 2. Purchasing call options contracts (AKA long call): You purchase call options contracts when you think the price of a stock will go up in the near future. ex. JetBlue (Nasdaq: JBLU) is trading at $10.20/share. You believe that the price of JBLU share will go up to $12.00 for some reason. You will buy one Call Options contract with $11.00 strike price. Next week, the price of JBLU share does go up to $12.00. You exercise the contract, which means: you buy JBLU shares for $11.00 per share instead of the market price $12.00. Options could be thought of as an insurance which you use to hedge against the volatility of the market. Options could also be written by you (AKA shorting puts or calls). But I could explain to you later once you get the above. this is not exactly layman's terns, but it is a simple a very good explanation http://en.wikipedia.org/wiki/put_option... http://en.wikipedia.org/wiki/call_option... A call option is the option, but not the obiligation, to buy stock at a certain price for a set amount of time. A put option is an option, but not the obiligation, to sell a stock at a certain price for a set amount of time. Most often put and call options are referred to in terms of stocks but they are applicable to other investments and contracts. An option is the right, not the obligation to buy a financial instrument for a specified price; meaning you can buy it or you don't if you don't want to. Options are bought and sold in 100 share contracts. When you sell or buy an option you are buying a contract not the stock that the contract represents. Remember that each option contract represents 100 shares of the underlying stock. There are two kinds of stock options: call options and put options. Call options give the buyer the right not the obligation to buy a stock at a certain price by a certain date. John has 100 shares of Coke stock. Coke stock is trading at $50 a share.It is June and John sells a call option for $50. You get by multiplying $0.50 X 100 = $50. The $0.50 is a random number; but this is about how much an option will sell for. The strike price is $55 and the expiration date is is July the 12th. So anytime between the date that John sold the call option, he gave some one else the right to buy his 100 shares of Coke stock for $55. If the stock price goes higher than the $55 strike price, you can sell the option and make money. If the stock is lower than the strike price by expiration, then you will lose money. A put option gives you the right to sell a stock at a certain price by a certain day. It is the opposite of a call option. If you owned 100 shares of Coke. You could buy a put option. No matter how much Coke goes down, you would be able to sell at the option's contracted price. In conclusion, an option is just a contract that gives you the option to buy or sell a stock at 1. a certain price and 2. by a certain date. The call gives you the righ to buy and the put gives you the right to sell. I hope this helps you. A CALL can make infinite money when a stock goes up, with a limited loss when stock goes down. A PUT can make huge money when a stock goes down, with a limited loss when stock goes up. |
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