Options for dummies. Can you explain how puts & calls work, simply?
"Here's my attempt at ""Options for Kids"" ""Hey kid... So you have this video game that you paid $50 for that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game for $40 in two months."" .... One month later .... ""Hey, Mr. Video Game Broker, I can't wait to get this new Tickle Me Elmo for my little sister for Christmas, but its hard to get and I'm afraid prices will go up. I can only spend $100!"" ""Ok kid, for $4 I'll sell you a 'Call' option to buy a Tickle me Elmo on December 21st for $95. If you can find it cheaper, the option can expire, otherwise $95 is the most you will pay!""" Put options are contracts to sell. You pay me a fee for the right to put the stock (or other underlying security) in my hands if you want to. That happens on a specific date (the strike date) and a specified price (the strike price). You can decide not to exercise that right, but I must follow through and let you sell it to me if you want to. Put options can be used by the purchaser to cap losses. For example: You purchase a PUT option for GE Oct19 13.00 from me. On October 19th, you can make me let you sell your GE stock to me for $13.00 a share. If the price for GE has fallen to $12.00, that would be a good idea. If its now at $15.00 a share, you will probably keep the GE or sell it at the current market price. Call options are contracts to buy. The same idea only in the other direction: You pay me a fee for the right to call the stock away from me. Calls also have a strike date and strike price. Like a put, you can choose not to exercises it. You can choose to buy the stock from me (on the strike date for the strike price), but I have to let you buy it from me if you want to.  For example: You purchase a CALL option for GE Oct19 16.00 option from me. On October 19th, you can buy my GE stock from me for $16.00 a share. If the current price is $17.50, you should make me let you buy if from me for $16.00. If its less than $16.00, you could by it at the current market price for less. Commonly, options are for a block of 100 shares of the underlying security. Note: this is a general description. Options can be very complicated. The fee you pay for the option and the transaction fees associated with the shares affects whether or not exercising is financially beneficial. Options can be VERY RISKY. You can loose all your money as there is no innate value in the option, only how it relates to the underlying security. Before your brokerage will let you trade, there are disclosures you must read and affirm that you understand the risk. I'm normally a fan of trying to put all the relevant info in an answer when possible, but this one's tough to do in one page.    Here's the best way, by far to learn the basics: The OIC (Options Industry Council) has a great, free website to teach investors at all levels about options. You can set up a learning path that will remember which lessons you've done, etc.  And they're really, truly not trying to sell you anything; their purpose is to promote the understanding and use of options. (buy these when you expect the price to go down) You 'lock in' the price you can sell at. If the price goes down below the 'locked-in' price, you buy at the new low price and sell at the higher 'locked-in' price; make money. (buy these when you expect the price to go up) You 'lock in' the price you can buy at.   If the price goes up above the 'locked-in' price, you buy at the 'locked-in' price and sell at the new higher price, make money. "A 'Call' gives you the right, but not the obligation, to buy a stock at a particular price. The price, called the ""strike price"" is fixed when you buy the option. Let's run through an example - AAPL trades @ $259. You think it's going up over the next year, and you decide to buy the $280 Jan11 call for $12.  Here are the details of this trade. Your cost is $1200 as options are traded on 100 shares each. You start to have the potential to make money only as Apple rises above $280 and the option trades ""in the money."" It would take a move to $292 for you to break even, but after that, you are making $100 for each dollar it goes higher. At $300, your $1200 would be worth $2000, for example. A 16% move on the stock and a 67% increase on your money. On the other hand, if the stock doesn't rise enough by January 2011, you lose it all.  A couple points here - American options are traded at any time. If the stock goes up next week, your $1200 may be worth $1500 and you can sell. If the option is not ""in the money"" its value is pure time value. There have been claims made that most options expire worthless. This of course is nonsense, you can see there will always be options with a strike below the price of the stock at expiration and those options are ""in the money."" Of course, we don't know what those options were traded at.  On the other end of this trade is the option seller. If he owns Apple, the sale is called a ""covered call"" and he is basically saying he's ok if the stock goes up enough that the buyer will get his shares for that price. For him, he knows that he'll get $292 (the $280, plus the option sale of $12) for a stock that is only $259 today. If the stock stays under $280, he just pocketed $12, 4.6% of the stock value, in just 3 months. This is why call writing can be a decent strategy for some investors. Especially if the market goes down, you can think of it as the investor lowering his cost by that $12. This particular strategy works best in a flat to down market. Of course in a fast rising market, the seller misses out on potentially high gains.  (I'll call it quits here, just to say a Put is the mirror image, you have the right to sell a stock at a given price. It's the difference similar to shorting a stock as opposed to buying it.) If you have a follow up question - happy to help. EDIT - Apple closed on Jan 21, 2011 at $326.72, the $280 call would have been worth $46.72 vs the purchase price of $12. Nearly 4X return (A 289% gain) in just over 4 months for a stock move of 26%. This is the leverage you can have with options. Any stock could just as easily trade flat to down, and the entire option premium, lost." "Great answer by @duffbeer. Only thing to add is that the option itself becomes a tradeable asset. Here's my go at filling out the answer from @duffbeer. ""Hey kid... So you have this brand-new video game Manic Mazes that you paid $50 for on Jan 1st that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game to me for $40 in two months."" Kid says ""Ok!"", sends $3 to Mr Game Broker who sends our kid a piece of paper saying: The holder of this piece of paper can sell the game Manic Mazes to Mr Game Broker for $40 on March 1st. .... One month later .... News comes out that Manic Mazes is full of bugs, and the price in the shops is heavily discounted to $30. Mr Options Trader realizes that our kid holds a contract written by Mr Game Broker which effectively allows our kid to sell the game at $10 over the price of the new game, so maybe about $15 over the price in the second-hand market (which he reckons might be about $25 on March 1st). He calls up our kid. ""Hey kid, you know that Put option that Mr Game Broker sold to you you a month ago, wanna sell it to me for $13?"" (He wants to get it a couple of bucks cheaper than his $15 fair valuation.) Kid thinks:  hmmm ... that would be a $10 net profit for me on that Put Option, but I wouldn't be able to sell the game for $40 next month, I'd likely only get something like $25 for it. So I would kind-of be getting $10 now rather than potentially getting $12 in a month. Note: The $12 is because there could be $15 from exercising the put option (selling for $40 a game worth only $25 in the second-hand market) minus the original cost of $3 for the Put option. Kid likes the idea and replies: ""Done!"". Next day kid sends the Put option contract to Mr Options Trader and receives $13 in return. Our kid bought the Put option and later sold it for a profit, and all of this happened before the option reached its expiry date." "An Xbox currently sells for $200 but you don't have the money right now to buy it.  You think the price of the xbox is going up to $250 next month. Your friend works at BestBuy and says he has a ""raincheck"" that allows you to buy the Xbox for $200 but the raincheck expires next month.  He offers to sell you the ""raincheck"" for $5. When you buy his raincheck for $5 you are locking in the right to buy the Xbox for $200. It is like an option because it locks in the purchase price, it has an expiration date, it locks in a purchase price, and it is not mandatory that you redeem it. That's an explanation for a call option in kids terms.  For more easy answers to the question what is a call option click now.  A put can be answered in a similar way.  Suppose you bought the Xbox for $250 and then the price drops back to $200.  If you keep your receipt, you have the right to return (sell the Xbox back) for $250 even though the current price is only $200.  Bestbuy has a 30 day return policy so your receipt is like a put option in that you can sell the Xbox back for a price higher than the current market price.   That's a simple example of a put option in kids terms.  For more easy answers to the question what is a put click now." "Put Options for Kids: You have a big box of candy bars. You saved up your allowance to get a lot of them, so you could have one whenever you want one. But, you just saw a commercial on TV for a new toy coming out in one month. Your allowance alone won't buy it, and you want that toy more than you want the candy. So, you decide that you'll sell the candy to your friends at school to buy the toy. Now, you have a choice. You can sell the candy now, and put the money in your piggy bank to buy the toy later. Or, you can save the candy, and sell it in a month when you actually need the money to buy the toy. You know that if you sell all the candy you have today, you can get 50 cents a bar. That's not quite enough to buy the toy, but your allowance will cover the rest.  What you don't know is how much you might be able to sell the candy for in a month. You might be able to get 75 cents a bar. If you did, you could pay for the toy with just the money from the candy and even have some left over. But, you might only be able to sell them for 25 cents each, and you wouldn't have enough to buy the toy even with your allowance. You'd like to wait and see if you could get 75 cents each, but you don't want to risk getting only 25 cents each. So, you go to your father. He and his co-workers like these candy bars too, so he'd be willing to buy them all and sell them to his friends the way you're planning to do with yours. You ask for the option to sell him all the candy bars for 50 cents each in one month. If you find out you can get more for them at school, you want to be able to take that deal, but if you can't sell them for 50 cents at school, you'll sell them to your dad. Now, your dad knows that he could have the same problem selling the candy at 50 cents or more that you are afraid of. So, he offers a compromise. If you pay him $5 now, he'll agree to the deal. You figure that even without that $5, between your allowance and the candy money, you can still buy the toy. So, you take the deal.  In one month, you can offer the candy at school. If nobody will pay 50 cents, you can sell the candy to your dad when you get home, but if the kids at school will pay 50 cents or more, you can sell it all at school. Either way, you have enough money to buy the toy, and you can also choose which price to accept, but you had to pay your dad $5, and you can't get that back, so if it turns out that you can sell the candy at school for 50 cents, same as today, then because you paid the $5 you don't end up with as much as if you'd simply waited. In the financial market, this type of option is a ""put option"". Someone who owns something that's traded on the market, like a stock, can arrange to sell that stock to someone else at an agreed-on price, and the seller can additionally pay some money to the buyer up front for the option to not sell at that price. Now, if the stock market goes up, the seller lets the contract expire and sells his stock on the open market. If it goes down, he can exercise the option, and sell at the agreed-upon price to the buyer. If, however, the stock stays about the same, whether he chooses to sell or not, the money the seller paid for the option means he ends up with less than he would have if he hadn't bought the option. Call Options for Kids: Let's say that you see another ad on TV for another toy that you like, that was just released. You check the suggested retail price on the company's web site, and you see that if you save your allowance for the next month, you can buy it. But, in school the next day, everybody's talking about this toy, saying how they want one. Some already have enough money, others are saving up and will be able to get it before you can. You're afraid that because everyone else wants one, it'll drive up the price for them at the local store, so that your month's allowance will no longer buy the toy. So, you go to your dad again. You want to be able to use your allowance money for the next month to buy the new toy. You're willing to wait until you actually have the money saved up before you get the toy, but you need that toy in a month. So, you want your dad to buy one for you, and hold it until you can save up to buy it from him. But, you still want it both ways; if the price goes down in a month because the toy's not so new anymore and people don't want it, you don't want to spend your entire month's allowance buying the one from your dad; you just want to go to the store and buy one at the lower price. You'll pay him $5 for the trouble, right now, whether you buy the toy he got you or not. Your dad doesn't want to have a toy he's not using sitting around for a month, especially if you might not end up buying it from him, so he offers a different deal; In one month, if you still want it, he'll stop by the store on his way home and pick up the toy. You'll then reimburse him from the allowance you saved up; if it ends up costing less than a month's allowance, so be it, but if it costs more than that, you won't have to pay any more. This will only cost you $3, because it's easier for him. But, because he's not buying it now, there is a small chance that the item will be out of stock when he goes to buy it, and you'll have to wait until it's back in stock. You agree, on the condition that if you have to wait longer than a month for your toy, because he couldn't get one to sell you, he pays you back your $3 and knocks another $5 off the cost to buy the toy from him. The basic deal to buy something at an agreed price, with the option not to do so, is known as a ""call option"". Someone who wishes to buy some stocks, bonds or commodities at a future date can arrange a deal with someone who has what they want to buy them at a specific price. The buyer can then pay the seller for the option to not buy. The counter-offer Dad made, where he will buy the toy from the store at whatever price he can find it, then sell it to you for the agreed price, is known as a ""naked call"" in finance. It simply means that the seller, who is in this case offering the option to the buyer, doesn't actually have what they are agreeing to sell at the future date, and would have to buy it on the open market in order to turn around and sell it. This is typically done when the seller is confident that the price will go down, or won't go up by much, between now and the date of the contract. In those cases, either the buyer won't exercise the option and will just buy what they want on the open market, or they'll exercise the option, but the difference between what the seller is paying to buy the commodity on the market and what he's getting by selling it on contract is within the price he received for the option itself. If, however, the price of an item skyrockets, the seller now has to take a significant, real loss of money by buying something and then selling it for far less than he paid. If the item flat-out isn't available, the buyer is usually entitled to penalties for the seller's failure to deliver. If this is all understood by both parties, it can be thought of as a form of insurance." In addition to all these great answers, check out the Wikipedia entry on options. The most important thing to note from their definition is that an option is a derivative (and nothing about any derivative is simple).  Because it is a derivative, increases or decreases in the price of the underlying stock won't automatically result in the same amount of change in the value of the option. So, child, your goal is to make money? This is usually achieved by selling goods (say, lemonade) at a price that exceeds their cost (say, sugar, water and, well, lemons). Options, at first, are very much same in that you can buy the right to engage in a specific future trade. You make money in this situation if the eventual returns from the scheduled trade cover the cost of purchasing the option. Otherwise you can simply opt out of the trade -- you purchased the right to trade, after all, not any type of obligation. Makes sense? Good. Because what follows is what makes options a little different. That is, if you sell that same right to engage in a specific trade the situation is seemingly reversed: you lock in your return at the outset, but the costs aren't fully realized until the trade is either consumed or declined by the owner of the option. And keep in mind that it is always the owner of the option who is in the driver's seat; they may sell the option, hold on to it and do nothing, or use it to engage in the anticipated trade. And that's really all there's to it.
"For personal investing, and speculative/ highly risky securities (""wasting assets"", which is exactly what options are), it is better to think in terms of sunk costs. Don't chase this trade, trying to make your money back. You should minimize your loss. Unwind the position now, while there is still some remaining value in those call options, and take a short-term loss. Or, you could try this.  Let's say you own an exchange traded call option on a listed stock (very general case). I don't know how much time remains before the option's expiration date. Be that as it may, I could suggest this to effect a ""recovery"".  You'll be long the call and short the stock. This is called a delta hedge, as you would be delta trading the stock. Delta refers to short-term price volatility.  In other words, you'll short a single large block of the stock, then buy shares, in small increments, whenever the market drops slightly, on an intra-day basis. When the market price of the stock rises incrementally, you'll sell a few shares. Back and forth, in response to short-term market price moves, while maintaining a static ""hedge ratio"". As your original call option gets closer to maturity, roll it over into the next available contract, either one-month, or preferably three-month, time to expiration. If you don't want to, or can't, borrow the underlying stock to short, you could do a synthetic short. A synthetic short is a combination of a long put and a short call, whose pay-off replicates the short stock payoff.  I personally would never purchase an unhedged option or warrant. But since that is what you own right now, you have two choices: Get out, or dig in deeper, with the realization that you are doing a lot of work just to trade your way back to a net zero P&L.  *While you can make a profit using this sort of strategy, I'm not certain if that is within the scope of the money.stachexchange.com website." "You may look into covered calls.  In short, selling the option instead of buying it ... playing the house.   One can do this on the ""buying side"" too, e.g. let's say you like company XYZ.  If you sell the put, and it goes up, you make money.  If XYZ goes down by expiration, you still made the money on the put, and now own the stock - the one you like, at a lower price.  Now, you can immediately sell calls on XYZ.  If it doesn't go up, you make money.  If it does goes up, you get called out, and you make even more money (probably selling the call a little above current price, or where it was ""put"" to you at). The greatest risk is very large declines, and so one needs to do some research on the company to see if they are decent -- e.g. have good earnings, not over-valued P/E, etc.  For larger declines, one has to sell the call further out.  Note there are now stocks that have weekly options as well as monthly options.  You just have to calculate the rate of return you will get, realizing that underneath the first put, you need enough money available should the stock be ""put"" to you.   An additional, associated strategy, is starting by selling the put at a higher than current market limit price.  Then, over a couple days, generally lowering the limit, if it isn't reached in the stock's fluctuation.  I.e. if the stock drops in the next few days, you might sell the put on a dip.   Same deal if the stock finally is ""put"" to you.  Then you can start by selling the call at a higher limit price, gradually bringing it down if you aren't successful -- i.e. the stock doesn't reach it on an upswing. My friend is highly successful with this strategy. Good luck" "There are several tactics you might employ to help the situation.  You have two options, one is to increase your income, the other is to reduce your expenditure.  Paying off debt will also help but that may not apply to you. Most people find it easier to reduce expenditure, so I will explain that first of all. Then make sure you track your actual expenditure agains the budget, check it daily and make sure it is accurate, if you spend some money you didn't budget for then mark that down and make sure you budget for it going forward. Most people are surprised at how much they are actually spending, especially on trivial things like coffee, lunch at work etc.  You will then find you can start to reduce this expenditure, maybe by bringing lunch to work, skipping coffee every other day etc. By doing a budget you can reduce your expenditure and hopefully have some money left over to save - put a line in your budget marked savings (ideally on the day you get paid so you don't spend it)! If you ned to save $x by Y date then work out how much that works out in a month and put that into your budget, if you haven't got enough spare to do that then onto stage 2 With regards to increasing income, the obvious way is to do some overtime at work - can you do that? Alternatively you can get a part-time job, maybe a hobby that pays money?  I personally enjoy building web-sites as a hobby and I get about $20 a month from advertising on those, it's not much but it adds up over time. Finally how to actually save, what methods are there? Lots of options here, personally I buy shares with my savings, making sure I pick stocks that are currently cheap - this is quite risky and may not suit you but it works for me as I don't sell the shares until I actually need the money. Other options are regular savings accounts that pay a bonus after you've had the money in for (usually) 12 months etc.  They tend to pay a bonus at the end so you are incentivised to not touch your cash but you can get it out if you really need it. You can also work out how much ""spare"" cash you have monthly and then give yourself an ""allowance"" each month that you can spend on impulse items, but make sure you stick to that. Good luck!" First, it depends on your broker.  Full service firms will tear you a new one, discount brokers may charge ~nothing.  You'll have to check with your broker on assignment fees. Theoretically, this is the case of the opposite of my answer in this question: Are underlying assets supposed to be sold/bought immediately after being bought/sold in call/put option? Your trading strategy/reasoning for your covered call notwithstanding, in your case, as an option writer covering in the money calls, you want to hold and pray that your option expires worthless.  As I said in the other answer, there is always a theoretical premium of option price + exercise price to underlying prices, no matter how slight, right up until expiration, so on that basis, it doesn't pay to close out the option. However, there's a reality that I didn't mention in the other answer: if it's a deep in the money option, you can actually put a bid < stock price - exercise price - trade fee and hope for the best since the market makers rarely bid above stock price - exercise price for illiquid options, but it's unlikely that you'll beat the market makers + hft.  They're systems are too fast. I know the philly exchange allows you to put in implied volatility orders, but they're expensive, and I couldn't tell you if a broker/exchange allows for dynamic orders with the equation I specified above, but it may be worth a shot to check out; however, it's unlikely that such a low order would ever be filled since you'll at best be lined up with the market makers, and it would require a big player dumping all its' holdings at once to get to your order. If you're doing a traditional, true-blue covered call, there's absolutely nothing wrong being assigned except for the tax implications.  When your counterparty calls away your underlyings, it is a sell for tax purposes. If you're not covering with the underlying but with a more complex spread, things could get hairy for you real quick if someone were to exercise on you, but that's always a risk.  If your broker is extremely strict, they may close the rest of your spread for you at the offer.  In illiquid markets, that would be a huge percentage loss considering the wide bid/ask spreads. "If the strike price closest to the underlying has high open interest, the options expiration is a bigger event.   For instance:  stock is at $20 w/ average volume of 100,000 shares per day.    20 strike has 1000 open interest.   In this example the stock will ""most likely"" pin at 20 if we were expiring tomorrow.     As u prob know, long calls at 19.90 close, turn into stock....long puts at 20.10 turn into short stock.   Option pros (high % of volume) dont want to be short or long after expiration.   Long call holders will sell above 20 to hedge, and long put holders will buy below 20.   1000 open interest is equivalent to 100,000 shares.   That's the same amount as the average volume.   Stock can't really move until after expiration.   If I am long 10 $20 calls, and short 1000 shares I am flat going into expiration.....unless the stock gets smoked and now I am synthetically long a put....Short stock + long call= Long Put Then watch out cause it was artificially locked down." Trying to make money on something going down is inherently more complicated, risky and speculative than making money on it going up.  Selling short allows for unlimited losses.  Put options expire and have to be rebought if you want to keep playing that game.  If you are that confident that the European market will completely crash (I'm not, but then again, I tend to be fairly contrarian) I'd recommend just sitting it out in cash (possibly something other than the Euro) and waiting until it gets so ridiculously cheap due to panic selling that it defies all common sense.  For example, when companies that aren't completely falling apart are selling for less than book value and/or less than five times prior peak earnings that's a good sign.  Another indicator is when you hear absolutely nothing other than doom-and-gloom and people swearing they'll never buy another stock as long as they live.  Then buy at these depressed prices and when all the panic sellers realize that the world didn't end, it will go back up. "If you buy a call, that's because you expect that the stock will go up. If it does not go up, then forget about buying more calls as your initial idea seems to be wrong. And I don't think that buying a put to make up for the loss will work either, the only thing that is sure is that you will pay another premium (on a stock that could stay where it is). Even if you are 100% sure that the stock will go up again, don't do anything, as John Maynard Keynes stated: ""Markets can remain irrational longer than you can remain solvent"". My idea is: wait until the expiration date. The good things about options is that you won't lose more than the premium that you paid for it and that until it reaches its maturity you can still make money if the market turns around. More generally, when you are purely speculating, adding to a position when it goes against you is called ""averaging down"". I sincerely discourage you to do that : If the stocks goes in the wrong direction, that means that your   initial idea was wrong in the first place (or you were not right at   the right moment). In my opinion, adding up to a wrong idea is not the   right thing to do. When you are losing, just take your loss and don't   add up to your position based on your emotions. On the other hand, adding to your position more when the stock goes in   your direction is called ""pyramiding"" and is, in my opinion, a better   way of doing things (you bought, you were right, let's buy more). But   at some point you will have to take your profits. There are plenty of other stocks on which you can try to invest and the market will still be here tomorrow, there will be other opportunities to make profits. Rushing things by constantly trying to have a position is not a good idea. Not doing anything is also a strategy." Many of the Bitcoin exchanges mimic stock exchanges, though they're much more rudimentary offering only simple buy/sell/cancel orders.  It's fairly normal for retail stock brokerage accounts to allow other sorts of more complex orders, where once a certain criteria is met, (the price falls below some $ threshold, or has a movement greater than some %) then your order is executed.  The space between the current buy order and the current sell order is the bid/ask spread, it's not really about timing.  Person X will buy at $100, person Y will sell at $102.  If both had a price set at $101, they would just transact.  Both parties think they can do a little bit better than the current offer.  The width of the bid/ask spread is not universal by any means.  The current highest buy order and the current lowest sell order, are both the current price.  The current quoted market price is generally the price of the last transaction, whether it's buy or sell.