Put and Call Options Explained in a Simplified Way

  • January 29, 2018

Need put and call options explained? Watch our video to learn how calls and puts work.

Put and Call Options Differences Explained

  • Call options mean that you believe the price of the underlying security is going up. Hence, you are bullish or going long. Put options mean that you believe the price of the stock is going down. Hence, you are bearish or going short. Directional bias is one of the most important differences.

Need put and call options explained? In this blog post we will talk about how to trade call option and put option contracts. Need put and call options explained in a simplified manner? Don't worry...we've got you covered.

Puts and calls are used in options trading.  When you believe a stock is going to go up, you buy a call. When you believe a stock is going to go down, you buy a put. Trading puts and calls are a great way to trade the big money stocks.

Put and call options explained: When purchasing 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. 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.

put and call options explained

Above: A typical options chain of $NVDA. Notice the expiration dates are in yellow, the green and red columns show how much the calls and puts have gone up or down

1. Put And Call Option Expiration Dates

Call option and put option contracts have expiration dates. They are not like stocks in the sense that you can hold them forever.

They do expire and they also lose money faster the closer they get to the expiration date (Theta decay or time decay). You can pick an expiration date of a week or you can go out a year or even two in some cases. Learn how to trade weekly options.

The more time you give yourself to capture the move of the stock 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 are buying a call option that is in the money then the strike price is below the market price of the stock.

If you are buying an in the money put option then 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 strike price that is higher than the market price. An out of the money put option has a strike price lower than the market price in this put and call options explained blog. Take our free courses for more help.

2. Technical Analysis

Knowing technical analysis basics is key to knowing which option is the best option. Being able to read the indicators will tell you which direction the stock is going as well as 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. Understanding how to read stock charts is fundamental to your trading success. 

put and call options explained

Above: Daily chart of $NVDA. Notice the up trend. Highlighted are yellow resistance areas, and green support areas. The stock has behaved somewhat predictably in each one of these zones. Options traders have done really well trading popular, liquid stocks like NVIDA

What Are the Types of Options?

  1. The different types of options are made up of calls and puts.
  2. You can be an options buyer or options seller.
  3. Naked calls or naked puts: most risky strategy.
  4. Credit spreads are the safest and most popular selling strategy.
  5. Debit spreads are directional biased and riskier than credit spreads but less risky than naked calls and puts.

1. Entries and Exits

Put and call options explained: Missing out on a good entry or exit can cost you money. 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. I find the MACD indicator to be helpful when I am looking at an entry exit. Take our options trading course.

The MACD is the is the moving average convergence divergence and it is the trend following momentum indicator. If I want to buy a call option I wait until the MACD is moving from bearish to bullish.

If I want to buy a put option I wait until the MACD is going from bullish to bearish. I use the 5 minute chart with the MACD indicator as a guide to start looking for an entry.

Then I use the 1 minute chart to get my exact 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 ok as well).

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. Watch our MACD Indicator Strategy video if you need more assistance.

We teach how to trade calls and puts live in our trading room each day. Check out our trading service to learn more about put and call options explained.

2. Study: Put and Call Options Explained

Put and call options explained means buying call option and put option contracts are a great way to make money in the stock market. You must study and practice to be successful at it.

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 that is where technical analysis comes in.

The technicals make the decision for you, and remove a lot of the emotions. Regardless, stock trading in general can be stressful and  can take its toll.

That’s why you see the Bullish Bears team preaching studying and practice paper trading options over and over. It’s the best way to be successful! If you need more help with options then make sure to take our options course below. 

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