Calls And Puts Explained

There are two kinds of options, calls and puts. And there are two ways you can trade each of these options. That's why you need calls and puts explained.

In the first two videos, we talked about what an option is and the language you're going to need to understand the concepts. We also went over why the potential gains trading options is so much higher than trading stocks, and we hit on the risk of trading and how to control those risks. So let's get into it!

When you have a call or a put you can either buy and option to open a trade or you can sell an option to open a trade. Call options give the holder the right to buy shares of stock at a specific price. That's the strike. Before a specific day, the expiration, the bought option becomes more valuable as the stock price goes up.

Remember the example we did in part one? We laid it out so a 10 year old could understand it. So you bought an option to own land for a strike by $100,000. And the price went up to $115,000. You exercise the option bought the land for 100,000 turned around and sold it for the $115,000. Well, options are the very same thing.

Now Put options gives the holder the right to sell shares of stock at a specific price, the strike before a specific date, the expiration. When you buy a put to open, you want the stock prices to be going down. You buy a stock at a new lower price forcing the other side of the contract to buy it at the higher price that was agreed upon.

And then you win selling options. It feels a little trickier but stick with it and the concepts are going to become clearer with time.

When selling a call option to open a trade you assume an obligation to sell the shares of stock at the strike before the expiration. Notice in there I said obligation.

When we buy things, we have the right. When we sell things we are obligated to do whatever the contract calls for. In the case of selling a call, you want the price to go down. No one in their right mind is going to force you to sell a stock at a higher strike, because you could then buy it at the lower strike if the prices have gone down. Bottom line, if the price of the stock drops, the contract could expire worthless.

Now notice I'm kind of easing you into the idea of not exercising your options, I just let them expire worthless, and I get to keep whatever I sold the the strike for. If the strike price goes up, you're gonna get called out, you will be forced to provide the shares that you don't own yet. You lose because you would have to buy the stock at the new higher price and sell it at the lower price of the strike you agreed upon.

When selling a put to open a trade you assume the obligation to buy shares of a stock at a specific price before a specific date. In this case, you want the stock prices to go down and the contract would then expire worthless. On a personal note, if you're a beginner, I very seldom exercise my positions. Rather I would just trade the options themselves buying and selling them and profit from those changes of prices over time.

Now let's cover the mechanics of trading options. Price and time periods are laid out on what we call Option Chains. All option chains on all platforms are pretty much laid out the very same. The charts always show the various option expiration periods available for each stock. When you open the expiration period, you're going to find the calls are going to be on your left and the puts will be on your right. The strikes are usually lined up right down the middle between the calls and puts. The open period shows the strike prices the bid and ask as well as the mark prices for each option.

Now the bid is what the platform wants you to pay for the option. The ask is what the platform would like to sell you the option for. And the mark is halfway between the bid and ask.

A good platform is going to have other factors you can add - the Greeks, open interest, and even your positions will show up. There's a lot you can do to manipulate this on a good platform. Some other tech terminology you're going to need is At The Money (ATM), In The Money (ITM), and Out Of The Money (OTM). And that's where the stock price is currently trading.

In The Money means just that means the price is moved into the money. And Out Of The Money is out of the money owed to you. On most charts In The Money is shaded so that they stand out better. Now you've got a foundation on how Option Chains are laid out and some of the terminology.

You also have some other very important decisions to make. And number one is choosing a great trading platform. It's critical to your financial future - the flexibility of that platform is very critical. You can find out more about how to pick a great trading platform HERE.

Here at Investing Buddies, we teach you to be a thinking trader and not just copycat my trades. Investing Buddies is just that we are a family of friends, we discuss the market, trading ideas, stocks, and even if you're brand new, you're going to be a welcomed addition. There's also a weekly webinar, my trade journals, our watch list of stocks worth considering portraits and much, much more.

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I hope you enjoyed calls and puts explained and happy trading!