I expect the price of stock to fall. do i buy calls or puts?

Question

and why not the other

Answer 1

You need to BUY PUTS

Answer 2

Calls give the buyer the right (but not the obligation) to buy the underlying stock at the exercise price.

Puts giver the buyer the right (but not the obligation) to sell the underlying stock at the exercise price.

In both cases, the seller of the option does have the obligation to do honor the contract if the buyer of the option decides to exercise his right to buy or sell the underlying stock at the exercise price.

So if you think that a stock is going down, then you could either buy a put, or sell a call.

Answer 3

I would hope you do neither until you understand options better.

Assuming you are looking at an unhedged position you would never want to buy calls on a stock you expect to fall in price. The reason is that call options have a positive delta, which means that the price of the option goes up due to an increase in the stock price and that the price of the option goes down due to a decrease in the stock price.

You might want to buy puts because put options have a negative delta, which means that the price of the option goes down due to an increase in the stock price and that the price of the option goes up due to a decrease in the stock price.

The problem is that delta on only one of several factors that change the price of an option. Another factor is vega, the amount the price of option changes does to a change in the implied volatility (IV) of the option.  Effectively the IV is the amount of volatility expected in the price of the underlying stock prior to expiration. When the IV goes down the price of the option goes down also.

Sometimes the change due to delta can be dwarfed by the change due to vega. For example, when earnings are released for a company everyone knows that can cause a big change in the stock price. The IV of short-term options is usually high just before earnings are announced. If earnings come are about what was expected the stock price may drop a little, increasing the price of a put a little. At the same time, IV may fall drasticly, reducing the price of the put option much more. Combined, the price of the option may go way down even though the price of the stock decreased.

For an options trader, buying an unhedged put is only the correct strategy if he thinks that

(1) the price of the stock will drop and

(2) the implied volatility of the option is lower than the amount of volatility the stock will experience.

If you want to learn more about options I suggest you start with free tutorials at

http://www.cboe.com/LearnCenter/OptionsI...

and

http://www.optionseducation.org/

These are both easy to understand, free, spamless high-quality sites.

Answer 4

If you bought a call and the stock price dropped, so would the call price (would also lose time value).

You would write (sell) a call if you own the stock and think it has temporarily peaked or will remain flat.  If you have to ask this question, I would say do NOT sell the call if you do not own the stock.

You would buy a put if you expected it to drop significantly.

Answer 5

Buy a put.

Or write a call