Call And Puts Explained – The Basic Terminology Needed To Understand Options Trading

In this post we are going to explain calls and puts. They are the basic terms you have to understand if you are ever going to comprehend the complex form of investing that is options trading.

Options trading is the buying of the right to purchase a underlying asset in a predetermined time but without the obligation to go ahead with the sale. If you do not go through with the purchase all that happens is option will expire and you lose the original investment.

So let us look into call and puts so you can understand the basics of options trading in greater detail.

Call And Puts

When it come to trading options there are two types call and puts:

Call – This gives the holder (buyer) the right to buy an asset at a predetermined price within a specified time period. People buy a call when they believe the price of the asset will rise.

Put - This is similar to a call as it gives the right of the holder to buy an asset within a predetermined time frame. The difference is that the holder hopes by the time the option expires the price of the asset has fallen.

So what that means in there are four positions that one can take in the options market.

The Four Positions In The Options Market

1 – Buyer of a call

2 – Seller of a call

3- Buyer of a put

4 – Seller of a put

So let us try and clarify things further when someone buys an option they are called a holder. When someone is selling an option they are called a writer. When it comes to the financial markets the holder is said to have the “long position” and the writer the “short position”.

The Important Point To Remember When It Comes To Holders And Sellers

Call and put buyers (holders) do not have to buy or sell. All they have purchased is the right to buy if they choose to do so.

Call and put sellers (writers) do have the obligation to buy or sell. This means even if the writer stands to lose a lot of money they still have to go through with the transaction.

Options trading is a complex subject that many people find hard to get to grips with. This is understandable and many people truly never get a handle on this form of trading. All I say is never get into this form of investment if you do not comprehend it fully as it is a very quick way to lose a whole lot of money.

If you want more information on this complex subject then visit the site and get your Options Trading Glossary.