There is a common misconception that options trading is only for experts or the highly educated. In reality, anyone can learn how to trade options, including high school students, retirees, and people in other careers.
If you were interested in trading options, but believe it's overwhelming, you are not alone.
I understand the need to simplify options trading so that my members can quickly learn the best option trading strategy. With that in mind, if you are searching for a super simple puts and calls for dummies then you've come to the right place.
Keep reading for a comprehensive overview of puts and calls for beginners, including the best strategy for options trading.
Puts and Calls for Beginners
As a beginner options trader, it is crucial to understand puts and calls. Put and call options are the foundation of options trading, and once you understand these concepts, you can start trading successfully.
Options are contracts, or agreements between two parties. For each call and put option there is a buyer and a seller, sometimes referred to as the option writer.
The option seller earns, and collects, premium for selling the option and the buyer purchases the right to exercise the contract. Put and call options are comprised of a contract for an underlying asset with a strike price and expiration date.
Strike price refers to the predetermined price at which the underlying asset can be bought or sold if the option contract is exercised.
The option expiration date is the date by which the option can either be exercised or expires without being exercised.
Underlying assets are the financial assets or securities that the financial derivative is based on, including stocks, commodities, market indexes, bonds, interest rates, and currencies.
You can find a variety of paid and free options trading courses, resources, and guides to provide call and put options examples, including David Jaffee’s blog.
What are call options?
Call options give the option buyer the right, but not the obligation, to buy a set amount of an underlying asset at the strike price on or before the expiration date.
A seller collects option premium for writing a call option contract. They are then obligated to deliver the set amount of the underlying asset if the buyer exercises the option contract.
What are put options?
Put options give the buyer the right, but not the obligation, to sell a set amount of an underlying asset at the strike price on or before the contract’s expiration date.
When you sell a put option, you collect option premium. You are also obligated to purchase the set amount of an underlying asset if the buyer exercises the contract.
Puts and Calls Explained Simply
If you are still scratching your head about call and put options, let’s break it down even further.
With call options, the option buyer is speculating that the price of the underlying asset will rise.
In other words, the option buyer believes that the value of the underlying asset will go up before the option contract’s expiration date (and they're betting that it'll go up higher than their strike price plus the premium paid prior to the expiration of their option).
If an option buyer exercises the call, they must purchase the underlying asset at the strike price.
An option buyer's maximum risk is the premium paid for the options contracts - and the potential returns can be very large if they achieve their desired movement.
The option seller collects the premium for the option contract, which they get to keep regardless of whether the option buyer exercises the call option.
The option seller risks having to sell the underlying asset at the strike price if the call is exercised.
Sellers of call options have a high probability of profits, but their potential risk is much higher than option buyers.
With put options, the option buyer is speculating that the underlying asset will decrease in value.
Put options are often used as portfolio insurance because option buyers would be able to sell their stock at the strike price, even if the current market price is much lower.
Selling put options is a great way to collect option premium and potentially purchase desirable stocks at a more favorable price according to options trading genius, David Jaffee.
Buying options can be a good strategic investment during certain periods of time. Purchasing options, and buying insurance, can act as a hedge for your portfolio during market crashes.
You just need to know when, and how, the best time to buy options will be!
Also, selling put options on securities that you want to own is a great way to increase your chances of being highly profitable and beating the market.
And, even if that option is not assigned, the option seller will still keep the option premium.
Options Trading for Beginners
Options trading may seem complicated on the surface, but it can easily be learned by beginners.
David Jaffee has taught more than 2,000 members how to profitably trade options by selling option premium.
With the best options trading live trades and courses, you can minimize your risk and maximize your potential for profit.
You don’t need a college degree or extensive training to sell option premium for a profit.
Instead, options trading for beginners can be learned through a comprehensive online options trading course.
Learn the basics of puts and calls, learn why selling option premium is your best bet, and learn how to win up to 98% of your trades with me at BestStockStrategy.com.
Frequently Asked Questions (FAQs)
What are puts and calls?
A call is the right to buy, a put is the right to sell. Both types of options come with two parameters: a strike price (the price at which you will buy, in the case of a call, or sell in the case of the put) and they also come with an expiration date.
How do calls and puts work?
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.
You can buy, or sell, options. If you sell a put, then you agree to buy the underlying stock at the strike price.
Is it better to sell calls or puts?
It depends upon the market environment. The market tends to go up, so it's better to buy calls when the market is oversold.
Conversely, it's a good strategy to buy puts when you feel that the market is overbought.
You can sell puts when you feel that the market is oversold as well.
Selling puts is a great way to acquire your favorite companies, or indices, at a discount.
In general, it's usually better to sell puts while also buying options at market extremes.
What happens when a put expires?
If an option expires out of the money, then the option expires worthless.
If a put expires in the money, then the put seller will be assigned the stock at the strike price.
If a call expires in the money, then the call seller (writer) will be assigned short stock at the strike price.
Are puts bullish or bearish?
Both. Option sellers can sell a put, which is bullish.
Option buyers can buy a put to protect their portfolio from a market pullback.
Put options for dummies?
Selling a put allows you to take ownership of the stock at the strike price.
It's usually best to purchase options at market extremes as hedges, and protection, for your trading account.