Futures & Options: Buying Calls and Puts
Description
This article is from the Investing Articles: Stocks and Options series.
Futures & Options: Buying Calls and Puts
Buying Calls
Buying a call is the most basic options trading strategy that you can utilize when expecting an upwards price movement in a particular stock. There are many different methods for choosing an underlying security, but when you buy a call, you are essentially saying that you believe that the underlying stock's value will increase before the option's expiration date.
When buying calls:
- Options closer to expiration will cost less but also have less time to make the desired price move.
- In-the-money options may be more expensive than out-of-the-money options, but out-of-the-money options have no intrinsic value, only time value.
Buying Puts
Just as call buying is the most basic options trading strategy you can employ when expecting upward movement in a stock, put buying is the most basic options trading strategy at your disposal when you expect a stock's value to drop. By purchasing a put, you are investing in the belief that a particular security's value will fall below a certain price by the option's expiration date.
When buying puts:
- Puts can allow you to profit from a downward move in an equity.
- It is not necessary for you to own shares of the underlying stock to buy a put on it. You would only have to buy the shares if you decide to exercise the option
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