Puts And Calls Explained

Puts and calls explained is the topic of today’s discussion. I know many of you are not even sure what puts and calls are, but you’re here on a finance site so you figure it must be something to do with finance. And you’re right, more specifically, puts and calls have to do with investing and stocks. So in around 300 or so words I’m going to try and explain puts and calls so that you’ll understand what they are, and perhaps in another article I’ll get to show you how buying and selling puts and calls make great investments if you know what you’re doing.

Let’s call this post puts and calls for dummies or calls and puts for dummies, whichever way round you like it. First though, we need to understand what type of investing vehicle puts and calls are. I mentioned they are a way of investing in stocks, but not directly. Puts and calls are options. So let’s define options. Simply put, an option is a contract that gives you theĀ privilegeĀ or right to buy or sell and underlying security (most times a stock) but not the obligation to buy or sell it. So let’s explain calls and puts for dummies individually. By understanding them alone you’ll likely get a better feel for how they work together.

So let’s firstly look at call options explained. A call option is the right to buy (or hold a long, bullish) the underlying stock. Therefore put options explained is the opposite. A put option is the right to sell (you think the underlying stock will go down in value) the underlying stock. I like to remember it this way. If I call you, I pick up the phone. Picking up the phone means to raise the phone to my ear which you can think of as a stock price going higher. When I’m finished calling you I “put” the phone back down on the receiver. Putting the phone from my ear to the receiver is putting the phone down, the stock price is lowered :)

So this is calls and puts explained quite simply. There is more to it, and perhaps I’ll get to post about how you can use calls and puts in your investing portfolio as hedges as well as opportunities to make some quick, fast money if you get it right. So I hope you’ve enjoyed puts and calls explained.