Using Puts versus Calls

by Amanda Harvey

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Introduction to Puts versus Calls

Puts and calls are the two basic types of options available to the trader, and simply stated, in most cases a call option gains value when the underlying asset rises in price, whereas a put option increases in relation to the fall in the price of the underlying asset. Determining the appropriate times to trade puts vs. calls is an important aspect of options trading.

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Application by Bulls and Bears

There are traders known as ”bulls”, who maintain a relentless optimism about the market moving in an upward direction. These investors tend to see any downturn as a temporary blip on the radar of forward movement, and are often disinclined to use put options. Bullish traders will seek out stocks that are moving upward, or that they believe are set to do so, and trade call options on these stocks, seeking to profit in tandem with the rising of the stock price.

On the other side of the spectrum, there are traders who are termed ”bears”, who tend to expect negative movement around every corner. Rather than choosing calls that make money when prices are going up, bear traders will usually take put options, hoping to gain a profit when prices plunge as the bears believe they inevitably will.

Other Applications

While bull or bear traders generally choose to trade puts versus calls or vice versa according to their general outlook on the market, there are other traders who make their decisions of which direction to trade based more on a case by case study of specific stocks and their prediction of future price movement. By taking this approach, a trader may capitalize on the market, no matter what the market is doing. If the trader reaches the conclusion that a stock is moving upwards, that is their signal to choose a call option, whereas if they decide the market is moving downward, they will opt to trade a put.

When considering the application of puts versus calls, there is one instance in which puts have a specific function. This involves utilizing put options to hedge against possible losses in investments of the underlying stock. If an investor holds an amount of stock that they believe may be subject to an upcoming drop in price, they may decide to purchase a put option on that stock to offset that potential loss.

Conclusion

Whether you are a relentlessly bullish investor who wants only to make money when the market is making money, a determined bearish investor who expects inevitable downturns and wants to find the benefit in these, a balanced market player who wants to assess and find opportunities wherever they make exist, or a stock market investor who understands the value of options as insurance, deciding when and whether to trade puts vs. calls is an integral part of a solid investment strategy.


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