Do you want to learn how to safely trade options and earn a profit?
David Jaffee of BestStockStrategy.com has taught more than 1,500 students a better way to invest.
By learning the ins and outs of put and call options, you can make informed decisions when trading.
If your goal is to minimize your risk and maximize your profit when trading options, keep reading to learn valuable information on options, calls and puts.
What is a call option?
With a call option, you can purchase 100 shares of a stock at a specific price.
The stock must reach the strike price on or before the expiration date.
If you buy a call option, you can purchase a security until the expiration date, but you are not obligated to purchase.
The call buyer pays a premium for the rights of the call option. They lose the premium if the underlying asset does not reach the strike price before the expiration date.
The maximum loss when buying a call is the premium paid.
At BestStockStrategy.com, we prefer to SELL options because the actual volatility is oftentimes less than the expected volatility.
A few times a year, the actual volatility is more than the expected volatility. Those traders who are able to mitigate their risk, using vertical credit spreads and by trading small, can earn substantial profits by selling expensive volatility.
It's also worthwhile to buy put options during market extremes, since these long-dated put options can oftentimes be worth ~30x more than what you paid for them during a market crash.
When selling a call option, the seller of the option collects premium, which is the seller's maximum gain, and as long as the underlying stock is trading below the strike price at expiration, then the seller is able to keep all of the premium.
Call Option Example (As a Seller)
For a call option, the buyer pays a premium for the right to buy 100 shares of a stock at a certain price until the expiration date.
For example, the buyer can obtain the right to buy 100 shares of Facebook ($META) at $150 (strike price) until the call option expires in three months.
If the option expires and the current price of the underlying is above the strike price, then the buyer will earn a profit (as long as the current option price exceeds the amount paid for it).
As option sellers, as long as the stock trades below the strike price at expiration, then the seller will keep the premium received.
If the underlying stock is trading above the strike price, then the seller can roll / manage that position until it's profitable.
In general, selling call options is a good strategy, however, I personally prefer to sell put options because the put options tend to get tested less frequently.
What is a put option?
With a put option, the holder has the right to sell a certain amount of an underlying security at the strike price.
The seller has the option, but not an obligation, to sell on or before the expiration date.
As the price of the underlying asset falls, the value of the put option increases.
The value of a put option decreases if the underlying asset increase in price.
Other factors, including volatility of the underlying asset price, interest rates, and time decay, can impact the value of a put option as well.
When selling a put option, the seller of the option collects premium, which is the seller's maximum gain, and as long as the underlying stock is trading above the strike price at expiration, then the seller is able to keep all of the premium.
Put Option Example
If you purchase a put option on XYZ stock at $10, you have the right to sell 100 shares of that stock at the strike price of $10 before the expiration date.
If XYZ stock falls below $10, you can earn a profit on the put option.
When selling a put option, you're essentially setting a floor where you agree to purchase the security.
Options: Call and Put
Call and put options differ in one major way.
When you sell a call option, you hope the security will decrease in price (or not go up much so that it doesn't penetrate the strike price).
For a put option, the seller hopes the price of a stock will stay the same or increases, while the buyer hopes that the underlying will decrease in price.
In either case, the writer collects option premium, collecting money with each option sold.
Selling options and collecting option premium enables the trader to act like an insurance company.
In my opinion, the best way to be consistently profitable is to sell option premium.
However, it's also important to protect yourself from downside risk when selling options. You can do this by strategically purchasing options.
Call and Put Options for Dummies
Chances are you are not an options trading dummy. Call and put options can quickly become complicated for even advanced traders.
If you want to learn about puts and calls for beginners, you need to enroll in David Jaffee’s options trading course.
Through his BestStockStrategy.com platform, David Jaffee educates beginners and advanced traders on how to trade options and profit from the stock market.
David Jaffee provides a step-by-step guide to trade options and earn a profit.
Instead of encouraging his students to trade too frequently like other options courses, David Jaffee teaches you how to act like an insurance company.
Options trading course reviews for BestStockStrategy.com speak for themselves, with countless students experiencing real-world success.
Learn more about call and put options by enrolling in David Jaffee’s options trading course or follow his actual trades with real-time trade alerts.
Frequently Asked Questions (FAQs)
What's the difference between calls vs. puts?
A call option gives the holder the right to buy a stock and a put option gives the holder the right to sell a stock.
When selling options, the option writer collects premium and is able to keep that premium as long as the contract expires worthless on the expiration date.
Is it safer to buy calls or puts?
They serve a different purpose. Buying calls is usually done when a trader, or investor, believes that an underlying is undervalued.
Buying puts is usually done when an investor, or trader, believes that a specific stock, or the market as a whole, will crash.
What is the riskiest options trading strategy?
The riskiest options trading strategy is to sell naked calls.
This is because the market tends to go up, and also selling naked calls carries unlimited potential risk.
What is the safest options trading strategy?
Selling, or buying, vertical spreads, is the safest options trading strategy.
What is the most successful options trading strategy?
This blog post explains the most successful options trading strategy
What is the safest options trading strategy for beginners?
The safest options trading strategy for beginners is to sell vertical credit spreads on large capitalization stocks with strong brands.