The Practical Way

Friday, 23rd July 2010

Buying Puts

Written by George Traganidas Topics: Options, Wealth Building

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Buying a put gives you the right to sell the underlying stock at a set price (the strike price) by a specified date (the expiration date). Your maximum loss with a put is limited to what you pay for the option up front (the premium).

Buying put options is a great way to profit from a stock’s fall while putting less of your cash at risk. In addition, you can buy puts to protect a stock – one that you’re bullish on for the longer term – from a near-term price drop. Buying protective puts can also help make your portfolio immune to a market crash.[...]

Friday, 23rd July 2010

Buying Calls

Written by George Traganidas Topics: Options, Wealth Building

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Buying (“buy to open”) call options is a lot like purchasing stock: You believe that a company you understand well will grow in value over a certain period of time, and you want to generate a profit from it. When you buy a call, you have the right to buy the underlying stock at a set price (the strike price) by a specified date (the expiration date). If the stock price goes up, the value of its calls will too.

In theory, there’s no limit to how high a stock price can go — and in turn, call options can have unlimited profit potential.[...]