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Author: JustMee01 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2201  
Subject: Re: TMI Date: 12/28/2013 12:20 PM
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fpuhan,

Disclosure: I myself am an options newcomer. I've been using them for about a year now.

These are all options terms. They should be able and willing to answer all your questions on the paid boards, I'd think. Another board that could be of use is a specific newbie board on the free side of TMF:

http://boards.fool.com/options-beginners-113753.aspx?mid=310...

I do not know what a diagonal roll is. That's not a basic strategy to my knowledge.

A put is simply an options contract that obligates the holder to purchase 100 shares of underlying stock at a defined "strike" price.

A call is an options contract that obligates the holder to sell 100 shares of the underlying stock at a defined strike.

If you are bullish on a stock, BOTH can be used to your benefit. If you are bearish on a stock, BOTH can be used to your benefit.

The difference between them is which counterparty originates the bet. That defines who pays, and who collects cash compensation to accept the risk. It also defines who holds the power to force execution. Whoever pays for the transaction has the right to force execution.

How can both be used bullishly or bearishly? Well, both can used long or short. Options have two counterparties. If you sell ("write") a put, you collect cash in exchange for the risk of being forced to buy shares. You are the seller, and your brokerage account will actually show you as short that put.

You SELL a put, when you think that its underlying stock will rise. As the put seller, the buyer gives you cash up front to accept the risk of being committed to buying stock XYZ. Say that put has a $20 strike and XYZ goes to $30. Then you get to keep the cash. Free money = Bullish!

On the other side of the trade, a BUYER of a put is bearish. He's betting that the underlying stock will go down. He has the ability to force you to buy XYZ at $20. If it goes to $10, he can buy 100 shares of XYZ for $1000 and FORCE you to buy it from him for $2000. So, he's betting XYZ will fall and paying you to accept that bet. That $100 you got for writing the put doesn't look so good now... A $1000 gain less $100 of upfront money to buy the put = A win for the Bear!

A call is the Ying to a put's Yang.

You SELL a call to generate cash from XYZ, when you believe it won't go up. You get money up front and are obligated to sell 100 shares of ABC at a set strike. Say ABC is at $25 and it goes to $10. You get to keep the cash. Your bearish stance wins you free cash.

The counterparty is giving you money and writing the call because he thinks that ABC will go up. He gives you $100, hoping that ABC goes to $50. If ABC goes to $50, he can FORCE you SELL him 100 shares of ABC for $2500. He can then sell them for $5000. $2500 in profit less $100 in cash upfront nets him $2400. A win for the guy bullish on ABC.

So, its not that one or the other is a bullish or bearish option. Both can be used by bulls or bears.

A short put position generates cash and is a BULLISH bet.

A long put position costs you cash and is a BEARISH bet.

A short call position generates cash and is a BEARISH bet.

A long call position costs you cash and is a BULLISH bet.

The difference between a put and call is really just who is getting paid to accept the risk that they might get forced to execute the contract.

Peter
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