Hi,I'm a bit of a novice investor, I'm hoping some other people talking about their put or call options here could shed a little light for me. I've done a little research into what puts and calls are but I'm having a hard time understanding the proper practical application. The example I looked at basically described a put as a fee you could pay to sell shares and a pre-arranged price anytime you want in the future up to a certain date, and a call would be the opposite.
A "put" gives the owner the right to sell a fixed number of shares at a particular "strike price." A call is the opposite: it gives the owner the right to buy a fixed number of shares at a particular strike price. These are rights, not obligations. The rights expire as of a particular date.
Options can be used to hedge a particular position. Suppose I hold 1000 shares of TSLA, and I want to ensure that their value doesn't fall below $25/share. I can buy puts at a $25 strike price, buying downside insurance by giving me the right to unload my shares at $25, regardless of the market price. I might choose to fund that insurance by selling calls, which will generate some cash at the expense of capping my upside, because I'm giving someone the right to buy my TSLA shares at, say, $30, regardless of the market price. I will, in effect, have used puts and calls to reduce the volatility of my position.
With modern trading platforms, a lot of this hedge value can be replicated by putting in "limit orders" to buy or sell a security. These don't cost anything (until they're executed), but run some risk of not having the liquidity to execute at your desired price, whereas options will always do what you expect them to.
I would counsel you, as a novice investor, to stick with straight purchases of equities. Options are in the "advanced techniques" category of investing. You can lose a lot of money, fast, if you screw up your portfolio while holding options. In the above example, if I sold my TSLA shares but forgot to buy back the call options, I would have a "naked" call position with potentially unlimited financial exposure. Not a good place to be if TSLA were to climb to over $100....
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