confused about calls and puts???

Question

whats the puropse of selling calls and puts??? (other than making a profit) can someone explain it a little more. is it better than buying a put or call?

Answer 1

This is a complex subject. Basically, for every buyer, there must be a seller and vice versa. If you own the underlying stock, say 100 shares of HON and you paid $50 pershare for those 1000 shares. If you want to earn some extra income on HON and you think HON is in a lull, not going up or down, then you can sell 10 Calls (covered) of HON. When you sell the calls you get the premium for the sell. This will vary depending upon several factors, the length of the call, the volatility of the stock, the strike price you sell it at and how far out into the future you sell the call for.

If at the end of your call period, it is exercised because the stock went into the money, then you keep the premium, but you must sell the stock at a lower price than you could have otherwise.

Selling uncovered calls (naked) or selling puts is very risky and most brokers will require that you have extra funds to cover your exercised calls and puts.

That's it in a nutshell. I highly recommend that you read a book on this subject that is perhaps the clearest reading I have found on this subject. It's called "Getting Started in OPtions", by Michael C. Thomsett. I found it on eBay for about $5.00. Most authors want 10X that much for a book on this subject and will not provide as much insight.

Best of luck to you.
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Answer 2

If you sell a call or a put you will probably make a profit, while if you buy a call or a put you will probably end up with a loss.

However, the size of the profit you can make by selling a call or a put is much smaller than the loss you can experience. Similarly, the maximum profit you can make by buying a call or a put is much greater than the maximum loss possible.

You cannot say selling is better than buying, or vice versa. Given a market that is at all efficient, your expected return will be similar buying or selling.

There are times people sell options in an attempt to improve the price for a stock transaction. For example, if a stock is selling for $49 I might sell a put with a strike price of $50 for $2, hoping I will get assigned and effectively buy the stock for $48 per share instead of $49 per share. Similarly, I might sell a call option in an attempt to sell stock for a higher price.

There are also times people buy or sell options to modifiy the risk associated with a stock position or other options. One of the simplest examples is selling an out-of-the-money covered call to get some protection against a decline in the stock price.

Answer 3

I'd stay away from both of them unless you really know what you are doing. In general, selling calls and puts (assuming you own stock to cover what you sell, ie these are covered calls and puts) is a pretty safe way to make some money from your stock at the time of the transaction, but for complex reasons it will actually often (usually in my opinion) end up costing you money in the long run.

The problems are:

1. If your stock does real well you make less than you would have just holding the stock (so your profit potential is somewhat limited but its more likely you will make some profit).
2. If your stock goes down you still get the entire lose (though the money you made selling the options offsets this loss)
3. Commissions are pretty steep as you must eventually buy and sell the underlying stock plus you must sell the option and eventually either buy back the option or have it exercised. Either way you engage in more commisionable transactions.

Look, there are books written on this sort of stuff, but in general it is a pretty safe way to make some money, but unless you really know what you are doing you are probably better off just buying good stocks (I could explain why you are better off but i'd get writers cramp way before finishing).

Answer 4

Considering you know what puts and calls are and that you have the stock for the particular options on hand.....

Selling a call or put will allow you to invest the proceeds of the sale.

If the stocks moves in the direction you are betting on, the option will be left worthless after the sale and you will profit on the proceeds of the sale. You will however own the risk of having written an option until the expiration date.

If the stock does not move in your direction, you are open to large losses.

The main point of selling options, in theory, is to enter one of many strategic option spreads.

You can read about many strategies here: http://en.wikipedia.org/wiki/Option_strategies

I can save you tons of time if you follow my advice to NOT invest with options. They make sense on paper, but do not make for good investments.

Answer 5

They relate to options a "call" is the right, not obligation to purchase shares at a pre agreed price and a

"put" is the right, not obligation to sell ahares at a pre agreed price.

Basically a bet on whether prices go up (Call) or down (Put)