Call Options vs. Put Options |
Posted: December 15, 2018 |
Call options and put options are essential components when it comes to options trading. Understanding the difference between these two types of options ensures you know which one is best for your investment and trading goals. Here, we explore what call and put options are, the differences between the two, and when you should use each. What Are Call Options? Call options are trade options that provide the option buyer with the ability to buy a commodity, stock, bond, or another financial instrument at a certain price within a specific period of time. The financial instrument is known as the underlying asset. Call option buyers make a profit when this underlying asset rises in price. Call options give buyers the ability to buy up to 100 shares of a company at a set price, referred to as the strike price, within a specified time period. When a buyer purchases the rights of the call option, the price paid for the call option is known as the premium. Call options are trade options that are typically used for three reasons: income speculation, income generation, and tax management. What Are Put Options? Put options are the other primary type of stock option. They provide the owner of the option with the ability to sell a stock, bond, or another financial instrument for a set price within a set time period. The owner does not have to sell the underlying security, but if they choose to do so, they can only sell it for the strike price. Put options rise in value as the underlying asset decreases in price. Call Options vs. Put Options
Image via Flickr by mikecohen1872 There are a few key differences between call options and put options, with the most important differences being:
When Should You Use Call Options? Most investors purchase call options when they are bullish on a stock or other financial vehicle because this type of option provides leverage. Traders will also purchase call options when they anticipate that the underlying futures price will rise in the commodities or futures markets. Additionally, advanced investors will often purchase call options to manage risk and leverage their portfolios. When Should You Use Put Options? Investors typically purchase put options when they expect stock to decline. A put option allows investors to turn a higher potential profit as opposed to simply short-selling the stock in a declining market. Put options can also be used to limit risk associated with the decline of a stock and can also help generate income from the premium. Understanding how call options and put options work can help you make good decisions when investing in stock options.
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