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jleenyy t1_jabmbtf wrote

A call option is a bet that a stock will go above the "strike price" by a certain date, called the expiry date. A put option is a bet that a stock will go below the "strike price" by the expiry date.

If the expiry date arrives and the stock hasn't done this, the option expires worthless and you won't get anything back. If the stock has done this, then your option is worth something, based on a bunch of calculations (Greeks) which I won't go into because it's way too advanced.

However, you are free to sell the options before the expiry date, and the value of the options at the time you want to sell is calculated based on the Greeks (Black Scholes Model).

There are plenty of resources available on YouTube and Investopedia.

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burman07 OP t1_jabnwam wrote

so I’m understanding the difference between the calls and puts, but is there no real, simple way to know how much money you’re getting out of the calls/puts?

Also, follow-up question, if the expiry date comes and the call/put was correct, does it do the same kind of math as it would if you had cashed out early?

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jleenyy t1_jabv3af wrote

Here's a summary of the Greeks which can give you a brief overview of what the formula involves, just to give you an idea of what factors can influence the option price. But another factor that contributes to the value of the option is demand and implied volatility (IV). The more that people want to buy (increased demand), the more the IV also goes up, and vice versa. Higher interest rates also increase the price of call options and vice versa - something to do with holding cash (this is one of the Greeks, called Rho).

If the expiry date comes ("maturity") and the call/put was correct, your options are considered to be "in the money". However, options are only contracts that allow you to buy give the holder the right to buy 100 shares of a company at the strike price. So at maturity, the contract is yours and you can choose to exercise (execute) it to buy 100 stocks from the company, exercise it partially, or not exercise it at all. This depends on how much money you have in your account and also how your broker handles options at maturity. Some brokers will automatically exercise the options but give you the difference in cash.

In regards to exercising options, you can do it at any point before maturity as well, since the contract is yours.

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ratherbealurker t1_jabnli0 wrote

If you want to remember the difference when buying a call or put, just remember:

A call is the option to pick up the phone and order the stock (buy) at the strike price.

A put is the option to put the stock into the market (sell) at the strike price.

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

Gets more complicated in reality and you can also sell contracts.

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cshaiku t1_jaboww9 wrote

> 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?

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Baktru t1_jabwyqs wrote

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.

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Prasiatko t1_jac5s2f wrote

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.

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ratherbealurker t1_jacd5id wrote

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.

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TheBeatdigger t1_jabl4p2 wrote

Plenty of YouTube vids about it. You’re basically betting on whether a stock (the underlying) will go up (call) or down (put) by a certain date (expiration date).

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