{"id":1600,"date":"2015-01-02T15:35:28","date_gmt":"2015-01-02T20:35:28","guid":{"rendered":"\/?p=19"},"modified":"2016-07-05T15:49:03","modified_gmt":"2016-07-05T19:49:03","slug":"calls-and-puts","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/options\/basics\/calls-and-puts\/","title":{"rendered":"02) Calls and Puts"},"content":{"rendered":"

This is just going to be a quick overview to get you started.<\/p>\n

When a trader believes a stock will go up<\/b>, they would buy Calls<\/b>. \u00a0If they believe it will go down<\/b>, they would buy Puts<\/b>.<\/p>\n

A friend of mine says \u201ccall it up, put it down\u201d.<\/p>\n

You might be thinking \u201cOkay, great, so I can do exactly what I can do with stock trading. \u00a0I can buy long or I can sell short.\u201d \u00a0But, let me show you how trading options can GREATLY improve your ability to control your trade over stock trading.<\/p>\n

1) Leverage<\/b><\/h3>\n

For each 1 options contract<\/b> you buy, you are controlling 100 shares<\/b> of the underlying stock.<\/p>\n

Depending upon settings we will discuss in more detail later (strike price, expiration date, moneyness, etc) you can set your own leverage. \u00a0This gives you the ability to be very aggressive with the trade and gain a large amount of earning potential with a relatively small amount of money invested.<\/p>\n

For example on a $50 stock, you could buy at the money options for around $2. \u00a0Therefore, to control $5000 worth of stock, an options trader would pay $200 ($2 x 100 shares controlled). \u00a0You can see from that example, just how leveraged your money becomes with options.<\/p>\n

Next,… let\u2019s look at the risk protection qualities of options<\/p>\n

2) Risk Control<\/b><\/h3>\n

With stock trading, if you believe a stock is going to go down, you could sell short that stock.<\/p>\n

This strategy gives you a limited return<\/b> potential and an UNLIMITED loss<\/b> potential. \u00a0Therefore, if you sell short, you could lose more than 100% of the value of your shorted shares.<\/p>\n

Options trading flips that risk\/reward back into your favor. \u00a0Instead of selling short, you can buy Puts in a stock you believe will fall in price. \u00a0The Puts give you UNLIMITED RETURN<\/b> and LIMITED loss<\/b> potential. \u00a0That sounds much better, doesn\u2019t it?<\/p>\n

Summary<\/strong><\/p>\n

So, to summarize: Calls <\/b>when bullish, Puts <\/b>when bearish. \u00a0Leverage your money much better than stock trading, AND ability to control your losses.<\/p>\n