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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 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 ...
