by SqoobySnaq
Saw a post earlier of someone explaining how puts and call options work, it was hilariously wrong. Here’s how they actually work.
Calls If a stock is trading at $50 and you think it’s going to go up to $60, you might buy a $55 “call” option for say, 20 cents. If the stock rose to $60, that would allow you to buy the stock at $55 (strike price) even though it’s valued at $60, netting you a $4.80 profit on each share. On the other hand, the person that sold you the “call” would be obligated to sell you the stock at $55 at a loss of $4.80. If the stock never rises above $55 by expiration date, the “call” expires worthless and the “call” buyer is out 20 cents and the “call” seller keeps the 20 cents.
Puts If a stock is trading at $50 and you think it’s going to go down to $40, you might buy a $45 “put” option for say, 20 cents. If the stock dropped to $40, that would allow you to sell the stock at $45 (strike price) even though it’s valued at $40, netting you a $4.80 profit on each share. On the other hand, the person that sold you the “put” would be obligated to buy the stock from you at $45 at a loss of $4.80. If the stock never drops below $45 by expiration date, the “put” expires worthless and the “put” buyer is out 20 cents and the “put” seller keeps the 20 cents.
TL;DR: If you think a stock is going to go up, you buy a call. If you think it’s going to go down, you buy a put. You’re basically betting on the price of the stock.
EDIT: I’m highly regarded and accidentally put the strike price at $60 when it’s actually $55. It’s correct now.