Options for Beginners: What Are Puts and Calls?

For investors interested in getting started with options, the myriad possible positions can seem intimidating. But all options strategies are made up of the same two components: puts and calls.

In this segment from Motley Fool Live that first aired May 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss these building blocks of options.

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Gillies: Puts and calls. Very simply, a call is the right to buy, a put is the right to sell. Both types of options, of course, come with two parameters. The first is a strike price, the price at which you will buy, in the case of a call, or sell in the case of the put, and they come with an expiration date. If it’s July 2021, it’s the third Friday of July. We mentioned Apple (NASDAQ: AAPL) so let’s use Apple as our example here. Apple is about $130 this morning. Excuse me, I’m going to sneeze here.

Bowman: [LAUGHTER] I’m coughing.

Gillies: If you were to buy a call option on Apple striking at a $120 expiring in July, then that gives you the right to buy Apple for a $120 up till July 16th at market close. The following Monday, you’re out of luck, you will not be able to buy anymore because your option gives you the ability to buy that particular stock for that particular price ended the previous Friday. Same with the put, if you have a put, I think Apple is going to fall because I think Tim Cook is going to get walked out of the quarter in handcuffs and Apple products will be thrown aside in favor of Microsoft Zune. Channeling my inner Seth Jayson, with the Zune.

Bowman: The Zune!

Gillies: He shows up occasionally. I mean, maybe buy a put option giving you the right to sell Apple, I’d say a $120, a strike price of a $120 until July. Believe me, these are not recommendations, but that’s just the basics. It’s basically buy and sell. Call, put.

Ellen Simonson Bowman owns shares of Apple. Jim Gillies owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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