Urgent Rookie Inquiry
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I am a rookie, and I just learned these principles from the forum:
Buy = positive term (+) = you make money if the underlying stock appreciates in value
Sell = negative term (-) = you make money if the underlying stock depreciates in value
Call = positive term (+) = you make money if the underlying stock appreciates in value
Put = negative term (-) = you make money if the underlying stock depreciates in value
Thus...
Buy x Call = (+) x (+) = now you know that you are looking to make money when the stock appreciates in value
Buy x Put = (+) x (-) = you make money when the stock depreciates in value
Sell x Call = (-) x (+) = you make money when the underlying stock depreciates in value
Sell x Put = (-) x (-) = you make money when the underlying stock appreciates in value
These principles precipitate from the "broker's" perspective (i.e., the contract perspective). As a rookie, I just want to make good personal buying decisions. What happens when I sell (Sell x Put; the underlying stocks that I bought) and they depreciated in value? Am I in a position to make money? What happens when I buy (Buy x Put)?
Get back to me. Cheers...
Anthony J. Crispigna
Buying a put option for speculative purposes would enable you to profit in a falling market. Alternatively, a classic use of options is as a means of portfolio protection. Buying a put option against a holding in the underlying shares would give you protection against a fall in the share price, while still allowing for participation in the profits that a rise in the share price would provide.
When selling a put option you have a contrarian view to the buyer of a put option. Thus, you would make money if the underlying stock goes up because the put buyer would not exercise the put. As such, your profit would be the premium you received from the unexercised put option that you sold.
Selling can be used on a stable stock to make generate some extra money.
Buying can be used to try to make some money on a moving stock.
There are also spreads and other stuff that can complete both objectives.
Some people say if you teach you can learn more. I have a long way to go..
To executivejock and menotellname,
Thank you for the thorough and insightful responses. Cheers...
acrispigna