Call and Put Options
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Call and put options are different ways to invest money, on top of trading stocks. They’re great ways for the uninformed to make terrible, uninformed financial decisions. So let’s learn about them for funsies! That way, we can at least say that we made terrible, informed financial decisions.
Calls
A call option is a contract to buy a stock at a set price.
The seller of this contract will “promise to sell the stock at price $X at any time over the next N time”. They charge a premium for their troubles, which they can immediately pocket.
The buyer hopes the price of the stock will increase, so that they can exercise the option. Exercising an option is akin to immediately buying the stock at $X and selling at current price.
Profit
If the price of the stock drops, the buyer will not exercise the option and it will expire. The seller will retain the stock and profit from the premium.
If the price of the stock increases, the buyer will exercise and can have unlimited profit (stock price has no ceiling).
The seller will be on the hook for acquiring the promised shares. Buying this on the open market can have unlimited liability, as a consequence.
Put
A put option is a contract to buy a stock at a set price.
The seller of this contract will “promise to buy the stock at price $X at any time over the next N time”. They charge a premium for their troubles, which they can immediately pocket.
The buyer hopes the price of the stock will decrease, so that they can exercise the option. Exercising an option is akin to immediately buying the stock at current price and selling for $X.
Profits
If the price of the stock increases, the buyer will not exercise the option and it will expire. The seller will retain the stock and profit from the premium.
If the price decreases, the buyer will exercise. Their profit is limited to basically 100% of the original valuation of the stocks in the contract. Similarly, the seller must agree to sell the stocks to cover and this means buying on market.
Calls are super dangerous
Puts have limited downside, losing the entirety of the stocks covered in the contract.
Calls have unlimited downside, losing as much as the market is irrational.
There are techniques to limit liability but I’m too deep in the water at this point anyways.