Wednesday, March 20, 2013

A Simple Explanation of Call and Put Options

Although I have experience trading call and put options, I attended a basic options seminar offered by my brokerage. I always learn something new, even from topics in which I have experience. In this seminar, I learned a very simple way to explain call and put options in layman terms.
  • Call option.   A call option is similar to a coupon which gives the buyer the right to purchase an item as a specified price.   It the item price is above the coupon price, I use the coupon.  If the item price is below the coupon price, I just buy the item without using the coupon.   A coupon usually also has an expiration date.   If consumers could purchase or sell the specified price coupons, the coupons would be a call option.
  • Put option.  A put option is similar to buying insurance to protect against damage to a house or a car.  Insurance generally has an expiration date and is renewed on an annual basis.   If my house or car is not damaged, I essentially lose the money I pay for insurance.  If my house or car is damaged, then I contact my insurance company to collect payment.
  • Of course, trading put and call options will involve additional complexity and knowledge.  However, this explanation serves as a good foundation for one just starting to learn about option trading.

    For more on The Practice of Personal Finance, check back every Wednesday  for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

    Copyright © 2013 Achievement Catalyst, LLC

    No comments: