Why would you want to buy a put or a call?

Question

Why would you want to buy a put or a call? Suppose you thought Apple's new I-Phone would be a huge boom for Apple, would you buy a put or a call on the stock? In order to answer this question, take a look at what Apple (trading symbol AAPL) is selling at right now and what it's puts and calls are selling for. With derivatives likes puts and calls, can an investor stand to make a lot of money with a minimal cash investment? Why? What about if he/she guesses wrong, do they loss a lot of money?

Answer 1

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The most common reason I would buy a call or a put is to offset the risk from another investment.

Less often I buy a put or a call because I am either bullish or bearish about a stock and I think the implied volatility (IV) for the option is too low.

Other people will buy options for other reasons.

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Not at this time. The IV for calls AAPL calls is currently 47.49%. Over the past year it has ranged from 23.34% to 57.74%, so it is still closer to the top of the range than the bottom or the range.

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It is possible but very unlikely. If you buy a far out of the money option a few days before expiration the option will probably only cost you about $0.05 per share. In the rare event that the stock makes a huge move (in the right direction) before expiration that option can increase in value to multiple dollars per share, giving you a huge percentage profit. Of course, most of the time you will lose 100% of your "investment" or, if you prefer, your "wager" since most people would consider that more of a gamble than an investment.

<<< What about if he/she guesses wrong, do they loss a lot of money?>>>

The loss will be 100% so if you paid a lot of money for the options you can lose a lot of money. If you paid a small amount once your loss will be a small amount. If you try this many times with a small amount your total loss can become a large amount.

Answer 2

To answer your question
1)Put options is a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.

Call options is a contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time.

2)If you are bullish on AAPL, then you would need to buy a Call Options.

3) Your maximum loss for any options premium is the premium itself when the stock price turn against you.
If the stock price does not move, then your options will expire worthless.
But if the stock price rise then your return can be very rewarding.

Answer 3

You should read about option trading instead, but you buy them to either protect yourself in a position you have in the underlying stock, or because you are trying to leverage your money. Like stock trading, yes, if you are wrong, you lose money (what you paid for the option).