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briansol · 03-10-2010, 04:09 PM

These two areas of trading are very confusing to me. I've tried to do some research on it, but it just doesn't make sense. Can anyone shed some light on these?

titan22 · 03-10-2010, 04:45 PM

i have a hard time with this too, so bear with me. and i'll do it in as few words as possible.

call option: right for a buyer to purchase a stock at a specific price. you pay the "premium" to do this.

example: msft is at $28. you think it will go to $35. but instead of buying 100 shares, you can buy a "contract" that will allow you to buy it a specific price in a certain time. lets say $30 within the next 60 days. if it goes to $32, you can buy it for $30. if it doesn't go above $30, it will expire worthless. (for lesson 1, we will ignore calculating the cost of the premium vs. the actual pps to make the contract profitable)

with a call, you can buy or sell them. obviously based on your position and belief of the rise or fall of a stock.

Put option: is a contract in which you can buy or sell the right to sell at a specific price. if you want to sell microsoft at $30, but only while it is above $30, you can buy the contract to sell shares. this will only be profitable to a buyer if the stock loses value below $30.

briansol · 03-10-2010, 04:51 PM

@calls

So, a call is basically a gamble that (using your example) I bet for $30 a share that it hits $35 a share? And if it hits 35, i have to pay the 30 and get regular shares, effectively making $5 a share on the gamble?

@puts

this makes no sense to me. why would i want to sell at 30 if its valued more than 30? why should i pay to lose money when i can just stop loss a regular trade?

titan22 · 03-10-2010, 08:51 PM

alright, i'll break it down a little better. it's a gamble with less money than actually going long on a stock. you don't have to pay the full $30/share to reap the benefits of $5/share growth. you might pay $100 or $1000 for the contracts. each contract gives you the right to buy 100 shares for $30 each, even though the stock is worth $35.

CALLS:

Stock-MSFT
Current Price-$28
Strike Price (price at which you agree to buy stock if you want to exercise option)- $30
Price you think MSFT will go to-$35
Premium-Price paid for option contract. This is what you pay for the RIGHT to buy a stock at the Strike Price.

If the stock is currently at $28, and you want to be able to buy it at $30 sometime in the future, you pay the premium. The option is executable OR sellabe. If you buy an option with a strike price of $30 and the stock goes to $40, you can execute it and buy the stock for $30, even though the current value is $40. you just made $1000. (it's actually less because you must subtract the premium paid, but you get the picture)

you buy calls if you think it will go above the strike price. you sell them if you think it's going to stay flat or go down in value.

PUTS: you are required to buy a put above the strike price because of how it's executed. if you buy a put below the current price, you lose money as soon as you make the trade. it's the opposite of buying a call. you buy before the price moves.

Stock-MSFT
Current Price-$28
Strike Price (price at which you agree to SELL stock if you want to exercise option)- $25
Price you think MSFT will go to-$20
Premium-Price paid for option contract. This is what you pay for the RIGHT to SELL a stock at the Strike Price.

If you think a stock will go down, you can buy the opportunity to sell it at a higher price than you believe it will go to. Its similar to selling short, but without unlimited loss opportunity. with a short sell, the stock could go to $100/youd be screwed. with the option, you would only lose the premium.

imagine a world where you can sell a stock for more than it's worth today. buying a put gives you that option.

briansol · 03-12-2010, 02:33 PM

I still don't fully get it....

titan22 · 03-12-2010, 03:57 PM

lets do an example. pick a stock that you think will go up. any stock is fine. tell me the symbol, price, and target price.

briansol · 03-14-2010, 11:24 PM

Let's just stick with MSFT for keeping everything together.

How about we play fill in the blank

current
$28

If I buy 100 shares on a call for $35 it will cost me _____ (+ fees, but ignore that as its not the issue I don't understand, unless fees are weird too)

Stock price goes to $40. I (made/lost) ________.
Stock price goes to $20. I (made/lost) ________.

If i just bought normal shares at $28, and stock goes to $40, I made $1200.
If i just bought normal shares at $28 and stock goes to $20, I lost $800.

titan22 · 03-15-2010, 04:28 PM

Quote:

If I buy 100 shares on a call for $35 it will cost me $63 (+ fees, but ignore that as its not the issue I don't understand, unless fees are weird too)

Stock price goes to $40. I (made/lost) +437 ($500 profit-$63 premium).
Stock price goes to $20. I (made/lost) -$63.

If i just bought normal shares at $28, and stock goes to $40, I made $1200.
If i just bought normal shares at $28 and stock goes to $20, I lost $800.

remember, you aren't "buying" 100 shares. you are paying $63 to be able to buy shares for $35 any time between now and expiration. This option in conversation is a "Jan 22 2011 35.0 Call". Meaning, it expires january 22 of 2011. It is for $35 strike price and it is a "call".

so any time between now and January 22, 2011, you can buy 100 shares for $35 each.

briansol · 03-15-2010, 08:51 PM

That's the key i was missing. It's basically a raincheck that costs a bit of money. I get it now.

I guess i need to figure out how to go back in time to see Jan 22 2001

titan22 · 03-15-2010, 09:26 PM

Quote:

Originally Posted by briansol

I guess i need to figure out how to go back in time to see Jan 22 2001

i screwed you on that one. it was supposed to read 2011.

03-10-2010, 04:09 PM	#1
briansol Administrator Join Date: Aug 2006 Location: Central CT Age: 30 Posts: 738 Rep Power: 10	Explain calls and puts These two areas of trading are very confusing to me. I've tried to do some research on it, but it just doesn't make sense. Can anyone shed some light on these? __________________ Any thoughts or opinions are that of my own. Research your buys and sales on your own. I am not a stock broker.

03-10-2010, 04:45 PM	#2
titan22 Super Moderator Join Date: Aug 2006 Location: West Coast Posts: 773 Rep Power: 5	i have a hard time with this too, so bear with me. and i'll do it in as few words as possible. call option: right for a buyer to purchase a stock at a specific price. you pay the "premium" to do this. example: msft is at $28. you think it will go to $35. but instead of buying 100 shares, you can buy a "contract" that will allow you to buy it a specific price in a certain time. lets say $30 within the next 60 days. if it goes to $32, you can buy it for $30. if it doesn't go above $30, it will expire worthless. (for lesson 1, we will ignore calculating the cost of the premium vs. the actual pps to make the contract profitable) with a call, you can buy or sell them. obviously based on your position and belief of the rise or fall of a stock. Put option: is a contract in which you can buy or sell the right to sell at a specific price. if you want to sell microsoft at $30, but only while it is above $30, you can buy the contract to sell shares. this will only be profitable to a buyer if the stock loses value below $30. __________________ This post does not express the opinions of the website, it's members, or its owner. Always invest with caution and do proper research. If you have questions, consult a paid, investment professional.

03-10-2010, 04:51 PM	#3
briansol Administrator Join Date: Aug 2006 Location: Central CT Age: 30 Posts: 738 Rep Power: 10	@calls So, a call is basically a gamble that (using your example) I bet for $30 a share that it hits $35 a share? And if it hits 35, i have to pay the 30 and get regular shares, effectively making $5 a share on the gamble? @puts this makes no sense to me. why would i want to sell at 30 if its valued more than 30? why should i pay to lose money when i can just stop loss a regular trade? __________________ Any thoughts or opinions are that of my own. Research your buys and sales on your own. I am not a stock broker.

03-10-2010, 08:51 PM	#4
titan22 Super Moderator Join Date: Aug 2006 Location: West Coast Posts: 773 Rep Power: 5	alright, i'll break it down a little better. it's a gamble with less money than actually going long on a stock. you don't have to pay the full $30/share to reap the benefits of $5/share growth. you might pay $100 or $1000 for the contracts. each contract gives you the right to buy 100 shares for $30 each, even though the stock is worth $35. CALLS: Stock-MSFT Current Price-$28 Strike Price (price at which you agree to buy stock if you want to exercise option)- $30 Price you think MSFT will go to-$35 Premium-Price paid for option contract. This is what you pay for the RIGHT to buy a stock at the Strike Price. If the stock is currently at $28, and you want to be able to buy it at $30 sometime in the future, you pay the premium. The option is executable OR sellabe. If you buy an option with a strike price of $30 and the stock goes to $40, you can execute it and buy the stock for $30, even though the current value is $40. you just made $1000. (it's actually less because you must subtract the premium paid, but you get the picture) you buy calls if you think it will go above the strike price. you sell them if you think it's going to stay flat or go down in value. PUTS: you are required to buy a put above the strike price because of how it's executed. if you buy a put below the current price, you lose money as soon as you make the trade. it's the opposite of buying a call. you buy before the price moves. Stock-MSFT Current Price-$28 Strike Price (price at which you agree to SELL stock if you want to exercise option)- $25 Price you think MSFT will go to-$20 Premium-Price paid for option contract. This is what you pay for the RIGHT to SELL a stock at the Strike Price. If you think a stock will go down, you can buy the opportunity to sell it at a higher price than you believe it will go to. Its similar to selling short, but without unlimited loss opportunity. with a short sell, the stock could go to $100/youd be screwed. with the option, you would only lose the premium. imagine a world where you can sell a stock for more than it's worth today. buying a put gives you that option. __________________ This post does not express the opinions of the website, it's members, or its owner. Always invest with caution and do proper research. If you have questions, consult a paid, investment professional. Last edited by titan22; 03-10-2010 at 08:53 PM.

03-12-2010, 02:33 PM	#5
briansol Administrator Join Date: Aug 2006 Location: Central CT Age: 30 Posts: 738 Rep Power: 10	I still don't fully get it.... __________________ Any thoughts or opinions are that of my own. Research your buys and sales on your own. I am not a stock broker.

03-12-2010, 03:57 PM	#6
titan22 Super Moderator Join Date: Aug 2006 Location: West Coast Posts: 773 Rep Power: 5	lets do an example. pick a stock that you think will go up. any stock is fine. tell me the symbol, price, and target price. __________________ This post does not express the opinions of the website, it's members, or its owner. Always invest with caution and do proper research. If you have questions, consult a paid, investment professional.

03-14-2010, 11:24 PM	#7
briansol Administrator Join Date: Aug 2006 Location: Central CT Age: 30 Posts: 738 Rep Power: 10	Let's just stick with MSFT for keeping everything together. How about we play fill in the blank current $28 If I buy 100 shares on a call for $35 it will cost me _____ (+ fees, but ignore that as its not the issue I don't understand, unless fees are weird too) Stock price goes to $40. I (made/lost) ________. Stock price goes to $20. I (made/lost) ________. If i just bought normal shares at $28, and stock goes to $40, I made $1200. If i just bought normal shares at $28 and stock goes to $20, I lost $800. __________________ Any thoughts or opinions are that of my own. Research your buys and sales on your own. I am not a stock broker.

03-15-2010, 08:51 PM	#9
briansol Administrator Join Date: Aug 2006 Location: Central CT Age: 30 Posts: 738 Rep Power: 10	That's the key i was missing. It's basically a raincheck that costs a bit of money. I get it now. I guess i need to figure out how to go back in time to see Jan 22 2001 __________________ Any thoughts or opinions are that of my own. Research your buys and sales on your own. I am not a stock broker.

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