Key Takeaways
● There are four basic options trades: buying a call, selling a call, buying a put, and selling a put.
● If investors believe the underlying asset price will increase, they could buy a call or sell a put. On the contrary, if investors think the underlying asset price will decline, they could sell a call or buy a put.
Understanding
Since there are two types of options, puts and calls, either one can be either bought or sold, we obtain a total of four basic option strategies: buying a call, selling a call, buying a put, and selling a put.
Buying a Call
Buying a call gives you the right, but no obligation, to buy the underlying stock at a strike price, and as a condition, you should pay the option premium.
You can profit if the stock rises, and the profit potential is theoretically unlimited for the stock price to rise to infinity.
You will lose if the stock falls, the max loss is limited, and the loss would be your paid for buying the call option.
Selling a Call
Selling a call obligates you to sell the stock at the strike price if the option is assigned, and in return, you will receive the option premium, which is the maximum profit you can make by selling a call.
You will lose when the stock price rises more than the strike price before or at the expiration date.
The max loss is unlimited for the stock price to rise to infinity. People are still selling a call because there is a high probability of success when selling very out-of-the-money calls.
If you are selling a call without any protection, you should carefully watch the market.
Buying a Put
Buying a put gives you the right, but no obligation, to sell the underlying stock at a strike price, and as a condition, you should pay the option premium.
You can profit if the stock falls, and the max profit is the strike price if the stock price falls to zero.
You will lose if the stock rises, the max loss is limited, and the loss would be your paid for buying the put option.
Selling a put
Selling a put obligates you to buy the stock at the strike price if the option is assigned, and in return, you will receive the option premium, which is the maximum profit you can make by selling a put.
You will lose when the stock price falls lower than the strike price before or at the expiration date. The max loss is the strike price minus the premium when the stock price falls to zero.
People are still selling a put because there is a high probability of success when selling very out-of-the-money puts.
If you are selling a call without any protection, you should carefully watch the market.
