Stock Trading Information Blog

Calls and puts, known as options, are ways to make money without selling or buying the actual stock. A person that sells a call gives the purchaser the right but not the requirement to purchase certain number of shares of his stock for a specified amount, the strike price. You exercise the option before the expiration date.

The expiration date is just like an expiration date on a coupon. After that date, the call is not of any value. The prices used are in intervals of $2.50 and $5, with some higher priced stocks at $10.

Puts, on the other hand, make the seller obligated to purchase a specified number of stock shares at a price mentioned in the contract before the expiration date. However, the purchaser of a put doesn’t have to sell if they don’t want.

If you sell a put for 100 shares of XYZ stock for 40 that expires in two months, the purchaser is making a bet that the stock drops in price and you’re betting it doesn’t. If the price drops to 35, he exercises the put and you have to pay 40 for the stock. If the stock rises to 45, you made money without buying anything because he obviously won’t want to sell.

Many people sell call options on stocks they hold when they believe that the price will drop. The money made from selling the option is one way of offsetting losses on a stock you want to keep and increasing overall profit. Sometimes they buy puts as a defensive mechanism to protect profits. If the stock drops, they have a built in buyer required to pay their asking price.

If you use options correctly, you can make more money and protect your profits. If you use this tip, remember me. I want you to succeed. Remember the more you know, the more you succeed. The more you succeed, the better I look.