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Author: TMFSandman Big red star, 1000 posts Feste Award Nominee! Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 267058  
Subject: Re: bull call vs bull put Date: 10/13/2012 12:32 AM
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Puts and calls are just tools. You can use them to create all sorts of bullish and bearish strategies. I'll start off with two simple bullish strategies and then offer up a more complex one:

One way to use calls if you were bullish on a stock would be to buy calls at a strike price you believe the stock will be able to exceed. You would be out the purchase price of the calls but if the stock closes above the strike price you'd be able to buy the stock at the lower strike price of the call. If the stock never rises above the call's strike price then the call would expire worthless and you'd be out the money you spent on it.

One way you could use puts if you were bullish on a stock would be to sell puts at a strike price you would be comfortable buying the stock at. When you sell the puts you create a little bit of income for yourself and take on the liability of having to buy the stock if it falls below the put's strike price. If the stock never falls below the strike price you get to keep the premium you sold the put at. If the stock does fall below the strike price you'd either have to buy the put back at a loss (since the put would be worth more now) or buy the stock at the strike price on the put.

These are just two simple examples. There are more complex bullish (and bearish) combinations of put/call buying and selling that can be done. One example of a more complex bullish strategy would be to buy a call and sell a put on the same stock. You might be able to cover (or at least reduce) the cost of the call purchase with the sale of the put. Now you'll get leveraged upside on the call as the stock price exceeds the call's strike price and it might not have cost you much or anything to do so due to the money you raised from the put sale. The downside is if the stock price tanks, the call will expire worthless and the put you sold puts you on the hook for either buying the put back at a loss or buying the stock at the strike price on the put.


Mike
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