What are Puts and Calls for a chosen closing date?

Question

What are Puts and Calls for a chosen closing date?

I have bought shares, I have spread traded daily, but how does options, puts and calls work?

Answer 1

A put or a call is an action on an option. An option gives you the right to buy or sell a contract or derivative but not the obligation. You can let the option expire if you wish to do so. This means losing out on a premium though.

A put is the right to sell but not the obligation to do so. A call is the right to buy but not the obligation to do so.

So for example you see that light sweet crude is currently trading at $115 and you think it will reach $130 in 3 months time; so you buy a futures call option (right to buy) on light sweet crude at $120 with a maturity date in 3 months time.

If you are correct and the price of oil hits $130 (or anything over $120 for that matter) then you would have a made a profit of $10 if you exercise that option. Of course you pay a premium for owning the option so you may pay $1 thus giving you a total profit of $9.

If however light sweet drops to $100 for some reason then you would lose $20, but since you have an option it does not mean you are then obliged to buy at $100. Thus you let the option 'expire' and you are left with a hedged loss of only $1.

There reverse is true for a put. Hope this helps.

Answer 2

There are a couple of articles on our website which hopefully explains options fairly simply.Have a look and post further questions there if necessary.

http://www.shareworld.co.uk/index.php?pa...

http://www.shareworld.co.uk/index.php?pa...