What Are Call and Put Stocks?
Options trading is one of the ways of buying and selling stocks that is open to an investor. It is less expensive for investors to buy and sell options than to trade in the stock itself. Trading options is a technique that is often used to hedge a stock portfolio and protect it from risk or potential loss.
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What is an Option?
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An option is a contract between a seller and a buyer. This contract gives the buyer the right, but not the obligation, to buy or sell particular assets at the strike price (a specific price set forth in the contract) before the expiration date. The seller benefits by receiving a premium from the buyer.
What are Puts?
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A put option is a contract that a seller of an underlying asset holds to sell at a specific price (strike price) up to a specific expiration date. Please note that there are no "put stocks." Puts are an action you take when trading a stock's options.
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What are Calls?
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A call option is the opposite of a put. A call option gives the holder the right to buy an underlying asset at a strike price for a fixed period of time. Please note that there are no "call stocks." A call is an action you take when trading a stock's options.
The Leverage Effect
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In options trading, you do not actually trade the stock itself, just the stock options. This gives you leverage. For instance, you are looking to invest $1,000 in company ABC. ABC is trading for $50, and ABC's option strike price for $50 is 2.00. You can own 20 shares of ABC stock, or you can buy five contracts of ABC and have the leverage of 500 shares.
Hedging & Risk Management
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Hedging is a strategy that can be used to offset unfavorable moves in your portfolio. When options trading, you might perform a "protective put" for every 100 shares in your portfolio. If there was any decline in your underlying asset, the protective put would offset any loss. Anyone can manage risk with hedging techniques. For examples, please follow this link http://www.optiontradingpedia.com/hedging.htm.
Warning
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Please consult your financial planner or adviser before trading stock options. If this concept of trading seems confusing, please do your research. The potential risk can be more than the potential gain. Also, be aware when trading options that you do not directly own the stock itself.
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