A listed option is a contract between two parties that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a specific date. Listed options are exchange-traded and can be bought and sold through brokerages like shares. When trading in options, there are two types of contracts that you can use: calls and puts. This article will provide a guide for understanding how each one works.
What are calls and puts in listed options?
In listed options trading, a call gives the holder the right to buy the underlying asset at a set price on or before a specific date. Conversely, a put gives the holder the right to sell the underlying asset at a set price on or before a specific date.
Options are generally used as a hedging tool by investors who want to protect their portfolios from potential market fluctuations. For example, if you own shares in Company ABC that you think will go up in value, you could buy a put option as insurance if the share price falls.
Calls and puts can also be bought as speculative investments in their own right. If you think the share price of Company XYZ is going to fall, you could buy a put option to make a profit from the expected price movement.
The benefits of using calls and puts
Many benefits come with using call and put options in your investment strategy.
One benefit is that they provide a high degree of flexibility when managing your risk. For example, if you own shares in Company ABC but are worried about a potential fall in the share price, you could buy a put option to protect yourself against downside risk.
Another benefit of using options is that they can be used to generate income. If you believe Company XYZ’s share price will remain relatively stable, you could sell both a call and a put option on the stock to collect the premium payments.
Finally, options can also be used as part of a more complex investment strategy known as a straddle. It is when you buy both a call and a put option on the same underlying asset with the same strike price and expiry date. This strategy can be used to profit from periods of high market volatility.
How to make a call or put trade
If you want to buy or sell a call or put option, you must do so through a broker. When making a trade, you will need to provide the following information:
- The name of the underlying asset
- The strike price of the option
- The expiry date of the option
- The type of option (call or put)
- The number of contracts you want to buy or sell
It’s also important to note that options are traded in lots. A standard lot is made up of 100 contracts, but some brokers do offer mini and micro-lots.
When buying an option, you will need to pay the premium upfront. The premium is the price of the option and is set by the market. When selling an option, you will receive the premium payment from the buyer.
Once you have bought or sold an option, you must monitor the underlying asset closely to see how the price moves. If the price moves in your desired direction, your trade will be profitable, and if the price moves against you, your trade will be unprofitable.
When to use a call or put trade?
There are many scenarios where a call or put option might be the best course of action.
If you own shares in a company and are worried about a potential fall in the share price, buying a put option can help protect your portfolio.
If you think a company’s share price is going to rise, buying a call option could allow you to profit from the expected price movement.
If you think a company’s share price will remain relatively stable, selling both a call and a put option on the stock could generate income.
If you want to profit from periods of high market volatility, buying both a call and a put option on the same underlying asset could be the best strategy.
If you want to know more on calls and puts; check out Saxo.