Call and put options are both types of securities that can be bought, sold or traded on financial markets. A call option gives the buyer the right to buy a certain quantity of shares at a fixed price within a certain amount of time, while a put option grants their owner to sell those same shares at the set price before the predetermined date expires.
Although there may be many differences between call and put options, their most important difference is whether they carry rights over other people’s securities. Call options generally do not confer any such rights and thus belong to an individual investor. In contrast, put options will usually be owned by someone else and entail specific responsibilities for their holder.
Benefits of call options
The number one benefit of call options is that if you’re looking for exposure in particular security without having to purchase it, you can “call” a call option. Call options greatly benefit investors looking for security price exposure while only paying a fraction of the total expense.
For example, imagine an investor who wants to purchase shares in Microsoft Corporation (MSFT) but feels that their current stored value would only allow them to get a minimal number of shares. In this case, they could buy call options on MSFT instead of purchasing actual shares.
If the market moves favourably, the investor will be able to exercise their right and buy a more significant number of shares at a set price point within a specified period. On the other hand, if the stock remains relatively stable or even dips slightly during that same period, the investor is not obligated to purchase the shares, and their option will simply expire.
Though it may be slightly more expensive than buying stocks outright, call options are an excellent alternative for investors looking to gain exposure to an asset without committing all of their stored value. This allows them the ability to maintain a higher degree of flexibility by being able to switch between trading stocks or exercising their options at any time before the expiration date, giving them more control over their financial choices.
This greater level of control can also benefit an investor who wants some security but does not have enough saved up for actual shares of stock. However, they could instead buy call options on 100 MSFT shares for the same price as 50 dollars. Thus, if the stock goes down or stays level during the option’s time frame, they will not be obligated to purchase anything and simply let their option expire.
On the other hand, if the stock increases by a certain amount (usually set by an underwriter with whom you must sign a contract) within that time frame, the investor will still only need to pay 50 dollars but will now have 100 shares in MSFT instead of none. Though slightly less beneficial than actually purchasing stocks, call options allow investors additional levels of flexibility while avoiding some of the negative aspects of equity ownership, such as limited mobility and unlimited liability.
Benefits of put options
The number one benefit of put options is that if you feel strongly about a particular stock’s price decreases, then “putting” a put option on it will help to protect your assets. Put options grant their holders the right to sell certain stocks at a set price within a predetermined amount of time and offer investors some degree of protection against losses if their investments decline in value.
While puts provide their holders with some degree of protection, they are not used by most long-term investors.
Calls are generally more beneficial for investors who want to buy stocks while puts provide their holders with more benefits than just protecting themselves from losses in the long-term. If you want to trade fx options online, we recommend contacting a reputable online broker at Saxo Bank and opening your demo account today.
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