Understanding Stock Calls and Puts: A Guide for Individual Investors

Conservative strategies can enhance a stock portfolio's earnings or protect against stock-price declines. For some investors, stock options are the answer, offering a way to buy or sell specific stocks at set prices during certain time periods. The article explains the concept of call options, which grant the right to buy a stock at a set price, and put options, which give the right to sell a stock at a set price. Options can be exercised before the expiration date or sold to any third party, trading on public exchanges like the Chicago Board of Trade.

Key Takeaways:

• A call option is a contract that gives the holder the right to buy a specific stock at a set price during a certain time period, usually three to six months.
• A put option is a contract that gives the holder the right to sell a specific stock at a set price during a certain time period.
• Investors can exercise options at any time prior to the expiration date or sell them to any third party, trading on public exchanges.
• A call option to buy 100 Merck shares at $40 was recently selling on the Chicago Board of Trade for $31.25.
• A put option to sell 100 Merck shares at $30 recently sold for $100.
• Buying a call option gives the holder the right to buy a stock at a set price, while buying a put option gives the holder the right to sell a stock at a set price.
• Investors can use options to hedge against losses or enhance earnings, but there is a risk of losing money if the stock's price does not move as expected.
• Dr. George Trivoli, a finance professor and eminent scholar, advises that investors with questions may contact him at P.O. Box 982, Jacksonville, Ala., 36265.

Statistics:

• A call option to buy 100 Merck shares at $40 was selling recently on the Chicago Board of Trade for $31.25.
• A put option to sell 100 Merck shares at $30 recently sold for $100.
• The typical time period for exercising options is three to six months.
• Investors can lose money if the stock's price does not move as expected, risking the full amount paid for the option plus brokers' commissions.

Sources:

• George Trivoli, "Your Investing"
• United Press International
• The New York Times wire service
• Jacksonville (Ala.) State University