Trading Options – Call and Put
Every trading option for any share has two sets of prices attached to it, the call price and the put price. These are technical terms used on the stock market, that mean, in simple terms, if the investor thinks the share price will go up, the call price is the price at which the investor the right but not the obligation to buy the shares. If the investor thinks that the shares will go down, the put price gives the right but not the obligation for the investor to sell at that price.
This can be quite a difficult concept to understand, but it is important that you do understand it before you take a gamble and get involved in something like spread betting. The financial markets can be incredibly dangerous for professionals, so make sure that you know what you’re doing before you get involved. make it very clear on their websites that there is a real opportunity of winning or losing large sums of money, but ultimately the final choice rests with you and you should make sure that you know what you are getting yourself in for.
A Call Option
If a company had trade options that expire on a fixed date every month, you could buy up a month or more in advance. On any given date the stock might be something like 195p and you have the option of choosing a 180p or a 200p strike price. The lower is more valuable for traders, because the shares value is higher, whilst the higher is above the current stock market price and therefore not an attractive proposition. You could buy a call option at 180p which costs a certain amount, say 17p, therefore if the share price tops 197p, you will make yourself a profit. However, if you think that the share price will go up further the higher strike price could be a better option, as the call option costs less.
A Put Option
If you hold the shares and want to put a base under the price, then you can take out a put option. Doing so gives you the right but not the obligation to sell at a set price. With the same example, guaranteeing a right to sell at 200p will cost 11p. If the share price is low, you sell at 200p (well above the odds) take off the put option price and take the profit. If the share price remains the same at 195p, whilst you would sell at 200p, take off the 11p costs and you make a loss. If the share price rockets, you can choose not to sell, in which case you lose 11p per share, but that may well be worth the cost of ensuring yourself against a heavy loss.
So there you have a quick guide to the call and put option, both can be useful (and profitable) in given situations, but both can be costly if you make the wrong decision, and until you know what you’re doing, it is not worth putting any money on it, even small amounts.