Need put and call options explained? Both of these components make up the basis of all options trading strategies. However, while buying puts and calls is a profitable strategy, there are some important aspects to know before trading them.
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Basics of Put and Call Options
- Call options mean that traders believe the underlying security price is increasing. They are bullish or going long. Put options mean that traders believe the stock price is going down. They are bearish or going short. Directional bias is one of the most important differences.
Puts and calls are used in options trading. When you believe a stock will go up, you buy a call. When you believe a stock will go down, you buy a put. Trading puts and calls are a great way to trade big money stocks.
When purchasing a call option and put option contracts, you are given the right but not the obligation to purchase the option contract at a set price. This is known as the strike price.
One options contract is the equivalent of 100 shares of the stock. So, for example, if you are looking at a stock and the technical indicators are bullish, and you want to buy a call option, you would go to the options chain and pick the price you want to purchase the option at with the expiration you want.
Expiration Dates
Call option and put option contracts have expiration dates. Therefore, they are not like stocks because you can hold them forever.
They expire and lose money faster the closer they reach the expiration date (Theta decay or time decay). So you can pick an expiration date of a week or go out a year or even two in some cases.
The more time you give yourself to capture the stock moves up or down, the better. You want your option to get to the price you picked (strike) at the time of purchase.
There are three different ways to buy a call or put option. They are in the money (ITM) at the money (ATM) and out of the money (OTM). If you buy a call option that is in the money, the strike price is below the stock’s market price.
If you are buying an in-the-money put option, the strike price is above the market price, and if you want to buy a call or a put option that is at the money, then the strike price is the same as the market price.
An out-of-the-money call has a higher strike price than the market price. Conversely, an out-of-the-money put option has a strike price lower than the market price in this put and call options explained blog.
Technical Analysis
Knowing technical analysis basics is key to knowing which option is best. In addition, being able to read the indicators will tell you which direction the stock is going and the best entry and exit.
Using the daily chart is the best way to find patterns. Patterns are also important in determining the direction of the stock. Therefore, understanding how to read stock charts is fundamental to your trading success.
What Are the Types of Options?
- The different types of options are made up of calls and put
- You can be an options buyer or an options seller
- Naked calls or naked puts: a riskiest strategy
- Credit spreads are the safest and most popular selling strategy
- Debit spreads are directionally biased and riskier than credit spreads but less risky than naked calls and put
Entries and Exits
Put and call options explained: Missing out on a good entry or exit can cost you money. So if you miss your entry on a call or put option contract and it’s running, don’t chase it.
That is a great way to make sure you lose money. In addition, I find the MACD indicator helpful when looking at an entry or exit.
The MACD is the moving average convergence divergence and the trend-following momentum indicator. If I want to buy a call option, I wait until the MACD moves from bearish to bullish. If I want to buy a put option, I wait until the MACD goes from bullish to bearish. I use the 5-minute chart with the MACD indicator as a guide to looking for an entry.
Then I use the 1-minute chart to get my duplicate entry. I try to get in as close to the 9 EMA as possible. So remember: Daily chart to identify the trend (hourly chart or 4-hr chart is also ok).
Use the 5-minute chart to find the patterns and setup, then use the 1-minute chart to get a very clean entry for your options trade.
Study
Put and call options explained means buying a call option, and put option contracts are a great way to make money in the stock market. First, however, you must study and practice to succeed.
If you don’t do this, you can end up taking losses. You will lose on some trades, but knowing when to close your trade is important and is where technical analysis comes in.
The technicals help with making trading decisions and remove a lot of the emotions. Regardless, stock trading can generally be stressful and sometimes take its toll.
If you need more help, take our options trading course.
