If you’re interested in trading options, you need to understand the difference between the two major types—calls and puts.

First, let’s review how options work. An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date.

As I mentioned, there are two types of options. One is the put option. It gives you the right to sell an asset at a certain price by a certain date.

That may seem complicated, so let’s look at an example.

Let’s say you own 100 shares of a company called Lemon Car Dealers, which you bought at $100 a share, and is still trading at $100 a share.

For some reason, you think the stock might decline in value, and you want to protect yourself. After all, if the company goes out of business, you’d be out 100 shares at $100 each, which is a total of $10,000.

So, you buy an options contract for $1,000. This particular contract lets you sell 100 shares of Lemon Car Dealers for $80 a share.

As you suspected, Lemon Car Dealers goes out of business. But guess what? You have a contract! You can sell the shares for $80 each. You get $8,000 from the sale, so you only have lost $2,000 of your original investment, plus the $1,000 the options contract cost you.

So, to sum up, put options are similar to “shorting” stock. You would buy a put option on a stock if you think the stock will decrease in value before the option expires.

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If you’re interested in trading options, you need to understand the difference between the two major types—calls and puts.

First, let’s review how options work. An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date.

As I mentioned, there are two types of options. One is the call option. It gives you the right to buy an asset at a certain price by a certain date.

That may seem complicated, so let’s look at an example.

Say you think a particular stock, which is currently trading at $100 a share, is going to skyrocket, but you’re short on cash at the moment.

So, you buy a call option on that stock for $1,000. It lets you buy 100 shares of the stock at $100 each anytime within the next three months.

As you predicted, the stock goes through the roof, hitting $1,000 a share. But guess what? You have a contract. Someone has to sell you the stock for $100 a share.

So, you borrow the cash, buy the stock for $100 share, and promptly sell it for $1000 a share. Your profit: $900 per share, or $90,000, minus the cost of the option contract.

So, to sum up, call options are similar to owning stock. You would buy a call option on a stock if you think the stock will increase in value before the option expires.

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You may think options investing isn’t for beginners, but many investors use it to protect their stock investments. So let’s take a look at how it works.

An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date.

I know that sounds confusing, so let’s look at an example.

Let’s say you own 100 shares of a company called Lemon Car Dealers, which you bought at $100 a share, and is still trading at $100 a share.

For some reason, you think the stock might decline in value, and you want to protect yourself. After all, if the company goes out of business, you’d be out 100 shares at $100 each, which is a total of $10,000.

So, you buy an options contract for $1,000. This particular contract lets you sell 100 shares of Lemon Car Dealers for $80 a share.

Two things could happen.

First, as you suspected, Lemon Car Dealers could go out of business. But guess what? You have a contract! You can sell the shares for $80 each. You get $8,000 from the sale, so you only have lost $2,000 of your original investment, plus the $1,000 the options contract cost you.

On the other hand, let’s say Lemon Car Dealers does really well, and the stock skyrockets to $200 a share. So, you just let the options contract expire. You’re only out the $1,000 it cost you—which isn’t bad, considering you can now sell your Lemon Car Dealers stock for $20,000.

One final note: What I just described is one type of option, called a put option. If you’re interested in trading options, you need to understand the other type as well—the call option.

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