cshaiku t1_jaboww9 wrote on February 28, 2023 at 7:17 AM

Reply to comment by ratherbealurker in ELI5 - What are calls/puts in stock trading, and how are returns calculated when they are executed? by burman07

> Think it’ll go up, use a call. Think it’ll go down, use a put.

If it goes down in price you would call to buy it at the lower price, not put. No?

Baktru t1_jabwyqs wrote on February 28, 2023 at 9:08 AM

No you would buy a call at a lower strike if it's going down but you think it will go up again soon. But trading calls puts is more complicated than just that. Generally speaking though, if you think the underlying will rise less than the interest rate, buy puts, if it will rise more, buy calls.

Prasiatko t1_jac5s2f wrote on February 28, 2023 at 11:14 AM

A call is basically an option to buy eg 1 share of ACME corporation at the price of $10 on or before a certain date. If the market price goes above $10 you would want to use the option to buy at $10 and then sell immediately at the higher market price.

ratherbealurker t1_jacd5id wrote on February 28, 2023 at 12:38 PM

Not really although you can use them in so many different ways. Here’s how I’ve used them, it’s been years since I’ve traded options because I’m heavily restricted at work, but in the past I’ve used these simple strategies.

Also first keep in mind that you don’t have to exercise an option that’s in the money (meaning profitable) you can just sell it.

Many times I owned a stock and just wanted to play swings without buying and selling it so:

Buy a call: I own ACME and it’s at $10 so I think it’s going to go up. I buy a call option that expires in a month or so with a strike price of 10 or 10.25. Then if it goes up to 12 I sell that option. I didn’t really want the shares so i did not exercise the option, just sold it for the profit.

Buy a put. I own ACME and I though it was going to dip. So it’s $15 and I buy a put option at a strike price of $15 or $14.50. If it drops then I sell that put. I want to keep my shares so I don’t exercise.

Selling them is opposite. When I bought calls I was betting it was going to go up. So sometimes I’d think that ACME was going to go down so I wrote and sold a call option. It’s at $10 so I sell a call and it goes down, that person that bought that call option with a strike around $10 is now holding a worthless contract since it’s now at $8. Why exercise and buy from me when it’s cheaper on the market? I pocket the money from selling the contract and it expires worthless. And if it did go up, well I still made profit on my shares just not as much as I could have.

Sell a put, I think it’ll go up so like the call sell I write the contract and take the money and it expires worthless. Why sell to me when you can sell to the market same price?

Very simplified and it gets deeper than that. Look up option strategies, like straddles.