Puts And Calls

Options to buy or sell stock at a set price are known as "puts and calls." These differ from the type of stock options you are offered as an employee of a company, mainly because you pay for them in cash up front. (Your employee stock options generally allow you to exercise the option to buy as long as you work for your employer).

The Advantages of Puts and Calls

So, how can you use puts and calls to your advantage? A put allows you to sell your stock at a specific stated price. This is commonly known as "strike price."

A call is best summed up as the opposite of a put. While a put allows you to sell shares at the strike price, a call allows you to purchase a specific number of shares at the strike price. The call is essentially a contract, guaranteeing you the right to purchase at the strike price.

When you purchase puts and calls, you pay a price, also known as the "premium." This premium guarantees you the right to buy and sell the stocks later at the strike price. This allows these options to perform as a type of insurance, or "hedging contract." However, keep in mind that unless you are a professional broker or a professional investor, any money you make or lose using put or call options will be considered a capital gain or loss.