Options Trading Explained: Buying Calls, Puts, and Selling Covered Calls & Cash-Secured Puts

Here is a simple guide to understanding calls, puts, and basic options selling strategies.

Buying Calls & Puts

Buying call option gives you the right, but not the obligation, to buy a stock at a predetermined “strike” price on or before a set expiration date. Calls allow you to profit if you believe a stock will go up in price.

For example, say XYZ stock is trading at $50 per share. You could buy a call option contract with a $55 strike price expiring in one month for a premium fee of $2 per contract. If XYZ shares rally to $60 within that month, your call option will be worth at least $5 intrinsic value since you have the right to buy at $55 and immediately sell for the $60 market price if you exercised the option. Your profit would be the $5 intrinsic value minus the $2 premium you paid, leaving you with $3 per share profit times 100 shares per contract.

Buying put option is essentially the opposite of a call and gives you the right but not obligation to sell shares at the strike price by the expiration date. Puts allow you to profit if the stock goes down.

For example, if you buy a put on XYZ stock with a $50 strike expiring in a month when it is trading at $55 and that the stock drops to $40 in 3 weeks, your put option will be worth $10 intrinsic value. Subtract the premium you paid and you net the difference as profit if selling that put…