Call and Put Options
A stock option is a contract giving the buyer the right, but not the obligation, to purchase or sell an equity at a specified price on or before a certain date. An option that lets you buy a stock is known as a “call” option; one that lets you sell a stock is known as a “put” option. If you do not exercise your right under the contract before the expiration date, your option expires, and you lose the premium—the amount of money you spent to purchase the option. Stock options are available on most individual stocks in the U.S., Europe, and Asia. You should note that, in addition to the U.S.-style options just described, there are also European-style options. They differ from the U.S.-style ones in that you can exercise them only on the expiration date, not during the period leading up to it.
How to Buy Stocks by Using Put Options
The following strategy for buying a stock at a reduced cost involves selling put options on 100 shares of a particular stock. The buyer of the options will have the right to sell you those shares at an agreed-upon price known as the “strike price.” Once you’ve chosen a stock that you believe would be worth owning at a particular strike price, there are steps you can take to attempt to carry out this common type of options trade:
Advantages of Options
There are three main advantages of using this stock options strategy to buy shares:
A Detailed Trade Example
Assume that a long-term stock investor has decided to invest in QRS Inc. QRS’s stock is currently trading at $430, and the next options expiration is one month away. The investor wants to purchase 1,000 shares of QRS, so they execute the following stock options trade: If QRS’s stock price does not decrease to the put options’ strike price of $420, the put options will not be exercised, so the investor will not be able to buy the underlying stock. Instead, the investor will keep the $7,000 received for the put options.
