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VisualMod t1_j24480m wrote

>Calls and puts are options contracts that give the holder the right to buy or sell an underlying asset at a specified price on or before a certain date. Calls increase in value when the underlying asset increases in price, while puts decrease in value when the underlying asset decreases in price.

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weiner_forest t1_j245jf9 wrote

Oversimplified: Imagine the price of Wendy's Baconator (tm) fluctuated based on demand.

Calls

You go into Wendy's on Monday and say: "I'll be back on Friday and I'll buy 100 baconators at $5 per baconator, regardless of the price. Here's $20 now for the priviledge." If you come back Friday and the Baconators are going for $6/per, you go ahead and buy your 100 Baconators at $500 bucks, then turn around and sell them to the other customers in line for $600 total, for a profit of $80 (remember the $20 you already paid for the privilege, you don't ever get that back).

Puts

You go into Wendy's on Monday and say, "I'll be back on Friday to buy 100 baconators at whatever price they are then, and promise to sell them back to you at $4/baconator. Here's 20 bucks." If you come back Friday and the Baconators have gone to $3/per, you go ahead and buy up your 100 baconators for $300, then turn around and sell them for $400, for a profit of $80 again.

In either case: if the baconators goes the opposite of where you want it, you can simply choose not to go through with it and just lose your $20.

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M4tooshLoL OP t1_j247fpt wrote

So the only risk of calls/ puts is paying for the privilage (its called premium right?) ?

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weiner_forest t1_j24bpix wrote

Yup. The problem, particularly with the morons here, they buy as many options as they can afford, because you don't actually need to be able to afford to execute the options.

In my above example, let's say you only had $20 total to spend. If the price goes down to $3, you still need to buy the $300 worth of Baconators in order to sell them at $400. Nope! The transaction goes through immediately.

The problem is someone will put their life savings of $100k into Baconator puts.

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M4tooshLoL OP t1_j24ocrc wrote

So I should only buy puts/calls in amount I can afford, got it. Also, what is exactly the difference between puts and short position?

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weiner_forest t1_j24syjl wrote

Puts is a short position.

And yea, you should only buy puts on what you can afford. You will almost certainly lose money on puts/calls starting out, and you will probably fail to ever beat a market index fund if you do it long enough. It's a casino. Treat it like blackjack.

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M4tooshLoL OP t1_j24trbk wrote

Basically I am interested in puts/ shorting stock,as I regularly buy stock but I always have to wait for it to go down and then buy the "dip". So I wanted to also try to make money when the market is going down.

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weiner_forest t1_j24vmel wrote

Put options is your best bet then, but like I said before, you're unlikely to beat the market. It's a casino, and the house tends to win.

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M4tooshLoL OP t1_j24w1jo wrote

If its risky, whats other option for me to make money on market during recession?

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weiner_forest t1_j26gfmw wrote

buy low and hold. look at any long term sp500 chart. whens the best time to buy? in the middle of a recession.

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VisualMod t1_j2447f9 wrote

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thisismyusername51 t1_j244pdr wrote

You CALL your brokers and PUT down all your money for them to lose.

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johncolt33 t1_j244wvi wrote

Well, how many licks does it take to get to the center of a chicken?

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mo2cii t1_j246b9h wrote

Puts: for putting

Calls: for calling

0