As you may know by now, there are two types of stock options - call options and put options.
You buy a call option if you expect the future price of a stock to rise (also known as a long position), as opposed to a purchasing a put option, which is what you’d purchase if you expect the future price of a stock to go down (also known as a short position).
You can use a simple example to help you remember the difference: When you call some one on the phone the receiver goes UP. When you put down the phone, the receiver goes DOWN.
Getting back to call options specifically, remember that they’re concerned with the right (not the obligation) to purchase a stock at a future time, at a pre-determined price. A previous example provided could be the purchase of shares of Apple Corporation at a predetermined price, for a 3-year period.
The put option is a little trickier to grasp for most people. That’s because, unlike with stock trading, options trading strategies allow you to make money when stocks go up and down.
Exactly the opposite to a call option, a put option gives the right – not obligation – to sell stock at a future date.
The put buyer, either believes that the underlying asset’s price will fall by the exercise date, or hopes to protect a long position in it. (a technique known as “hedging”). The advantage of buying a put over short selling the asset is that the option owner’s risk of loss is limited to the premium paid for it, whereas the asset short sellers risk of loss is unlimited. The put buyer’s (risk) of gain is limited to option’s strike price, less the underlying’s spot price, and the premium/fee paid for it.
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