Stock Markets Exposed

What does CALL, PUT, and STRIKE mean in stock investing?

Can you give a scenario in which one can gain from a Call option and a Put option? What's the significance of the Strike price? What are call and put expiration dates for? If your contract expires does it mean you should sell your stock whether you like it or not?

Public Comments

1. They're all terms used in trading options. Your best bet is to read up on it on Wikipedia.
2. A call gives you the right to purchase a stock at the current price. Call options are bought when the price of the stock is expected increase. A put option gives you the right to sell a stock at the current value, so they are purchased when the price is expected to decrease.
3. That's a bit long and complicated, but in short: Buying a call option is the right (but not the obligation) to purchase a stock at a predetermined price (the strike price). If you buy a call for ABC Company with a strike price of $20, you can buy the stock for $20. If the market price of the stock is $30, your position is profitable because you can still buy it for $20. Or, you can sell the contract at a profit without exercising it (actually buying the stock). If the market price of the stock falls to $15, you have a loss because no one will pay $20 for a $15 stock. A put is the right (but not the obligation) to sell a stock at a predetermined price (the strike price), so it is a bet that a stock will decrease in value). If you buy a put for $20 and the stock falls to $15, you can still sell shares for $20. If the stock goes up to $25, you have a loss. Again, you can sell the contract without actually having to exercise it. You can also sell calls and puts, but that's too complicated to explain here. For a more detailed explanation, go to the dictionary section of www.investopedia.com and search for "call" and "put".
4. A 'call' is a contract you can buy or sell, giving the holder the right to buy or sell the 'underlying' security. It's much cheaper to buy a 'call' than it is to buy the underlying security. The price at which you have the right to buy the security is called the 'strike price'. A 'put' is a contract you can buy or sell, giving the holder the right to SELL the underlying security at a given price - 'strike price'. For example, IBM might be trading at $101.60 (which it is at the moment). You can buy the right to buy the stock at a 'strike price' of $105. The $105 'strike price' doesn't change, only the value of this option contract. As IBM trades closer to $105, the value of your contract goes up. A put works in the opposite fashion. You can buy the put with a 'strike price' of $100. The value of your put increases as the price goes down. Both instances above are examples of 'out-of-the-money' contracts. You can also buy 'in-the-money' contracts, which have a strike price that is more favorable than the underlying price. There are thousands of ways to make money using these derivatives - and likely 10,000 ways to lose money. ---------- Edit: They all have an expiration. They expire either worthless - out of the money - or with value - in the money. Each contract has a value, which increases or decreases as the underlying increases or decreases in value - invert it for the put. As you get to the expiration, the value goes to zero, or underlying + strike price. ---- Edit: In reading Zmans comments, it occurred to me that you might take these snippets and jump into the market. I wouldn't. I'd suggest digging into pricing theory, the greeks and the reason you're interested in the options market.
5. While all the answers you have received are generally correct, I am not sure if they would be clear if you know nothing about options. If you are willing to invest about 30 minutes to get clear, accurate answers to your questions I suggest you go to http://www.cboe.com/LearnCenter/Tutorials.aspx and take the first one or two tutorials on options. If you are still interested in them you can go on and look at the remaining tutorials and get a much more complete picture.