How to Place a Put or Call on a Stock
A very useful tool available to investors is the buying of call and put options contracts. With these type of investments, the investor is buying a contract that represents an underlying stock. The options contract gives the investor the right,but not the obligation, to purchase the stock for a set price, called a strike price, within a set time frame. The investor pays a small premium for the contract which represents 100 shares of the underlying stock. The investor can exercise the contract, sell the contract or let the contract expire, which would result in the investor losing his premium.
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Instructions
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Open a brokerage account with a traditional broker or with one of the many discount online brokers like TDAmeritrade or Scottrade. The advantage of a discount online broker is that the trading costs are a fraction of what a traditional broker will charge. However if the investor is not comfortable with making investment choices without advice from an expert then a traditional broker is worth the extra fees.
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Gain an understanding of how puts and calls work. If an investor buys a put they are betting that the share price is going to drop below the strike price within the contract period. If they buy a call they are betting that the share price is going to rise above the strike price, thereby giving them the opportunity to buy the stock at the strike price and sell it for the current price and make a profit.
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Research the stocks being considered for an options contract investment. There are many online sources available to research market trends and the strength of individual stocks. Some of these include MSNMoney, SmartMoney.com, Yahoo Finance and Seeking Alpha. There are of course many others. Determining the short term direction of a stock is essential in knowing whether to buy a put or a call. When the share price rises above the strike price (for a call) or below the share price (for a put) the options contract is said to be in the money.
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Decide whether the contract will be exercised or sold if it is in the money. With a put option which is in the money an investor can sell the contract which would be worth more on its own. They could also buy the lower-priced shares in the open market then sell them for the strike price of the contract, thereby making a profit on the difference. With a call contract in the money, the investor has the same choices as with the put contract only the share price would be above the strike price.
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