Calls And Puts: Real-World Examples
There are many important things when it comes to trading. One of the two most important things are what we call, calls and put options. In this blog post, I’m going to explain what calls and puts are, and give a real life example of when I used one of these.
A call option gives the holder or buyer the right to buy a stock in the future at a specific price point (this is called the strike price). When you choose to buy a call option, you are hoping that the stock will go up in value. For example, let’s say that a certain stock is currently worth $50 per share. You could buy a call option with a strike price of $50, which gives you the right to buy that stock for $50 per share in the future. Now, if the stock price rises to $60, you can still buy it at $50 a share because you hold the call option. Then, you can sell it at its market price of $60, and make a $10 profit on each share.
Put options are almost the opposite of call options. A put option gives you the right to sell a stock at a given price in the future (called the strike price). For example, let’s say a certain stock is worth $50 per share. If we were to buy a put option with a strike price of $50, and the stock price drops to $40, you still have the right to then sell it at $50 a share because you hold the put option. At that point, you can buy the stock for the market price, $40, and sell it at $50 per share. You thus make a $10 profit per share.
I recently made a trade using a call option where I made some profit. I had been looking at different charts for a good amount of time and after seeing multiple stocks and charts in the process of going up I decided to buy a few calls of NVDA. I bought it at the white circle in the image below, and sold it at the second one. I made about $90 - $100 on this trade.
Calls and puts can both be very confusing and it takes a lot of time to understand strike prices. It takes even more time in order to figure out the right strike price that you want to buy a stock at. Sometimes you want to buy a high strike price, and sometimes you want to buy a low strike price. It really depends on how you are trying to execute the trade. Also, depending on how high or low the strike price is, there could also be a higher risk of losing money. However, when there is a higher risk of losing money, there is also a higher potential profit that you can make. You really have to balance the odds and make the decision based on what you want and what you think will happen.
Calls and puts are very important when it comes to trading. When we use them, we have to choose the exact strike price that we would like to buy the stock at. This can sometimes be a challenge because there are many options for strike prices so you just have to decide what strike price is best for you on that trade.
