Do you want to make money fast, without caring about the ups and downs of stock prices? Then, start trading in options. The name 'options' is itself suggestive – you get the option to buy or sell a security at a future date. You have the choice to trade with stocks, exchange-traded funds, commodities, indices, and likewise.
The two most important words related to options trading are puts and calls. Put option and call option are the two categories which denote the right to sell or buy a stock respectively on or before the end of the options contract term (date of expiration). The expiration date is slated on the third Friday of the contract month. Here's taking an in-depth look into the basics of these two categories:
Call Options – The Right to Buy
A call option entitles you with the right to buy a stock at a specified price (or strike price) on or before a fixed date (or expiry date). The advantage is that you can buy the stock at the strike price (laid down in the options contract) even if there has been a rise in the market value of the stock. So, by investing less amount you can buy higher priced stock. You even have the right to sell your option, if you are not interested to buy or exercise your trading rights.
Put Options – The Right to Sell
A put option entitles you with the right to sell option at a fixed price before or on the date of expiration. So, even when the market value of the stock takes a downward turn, you can make a profit by selling the stock at a higher rate (or the strike price). If you are not interested to sell the stock, you can sell the option to another interested trader for making profit.
Fluctuations in Calls and Puts Determine Your Move
The increase and decrease in value of Calls are respectably proportional to the upward and downward price trend of underlying security. For Put option, the case is reverse – Puts increase in value when under security security value goes down and decrease in value when underlying security value moves up. Here, anticipating the mood of the stock market is crucial before taking the final decision for buying a Call option or a Put option. Right analysis will make you take the correct move. Apart from market monitoring, you always need to take a note of the expiration date. Expiry date is the most crucial aspect of options trading. Option ceases to be an investment tool, if the buying or selling rights are not exercised at the right moment (either on the date of expiry or before that).
Options trading is a powerful money-earning instrument which gives individual investors and traders the ultimate power to enjoy financial freedom. You need to understand the basics of Calls and Puts to leverage your financial instrument. It will help you in making the most profitable financial move in accordance with purchasing and selling of the stock.