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Tuesday, February 24, 2009

Calls And Puts: Opposites Of The Same Coin

By Walter Fox

In the legal operation of trading, Calls and Puts are one of the methods utilized by investors. Puts allow the investor to sell stock within a predetermined period of time at a predetermined price. The investor who desires to do so can use Calls to acquire stock in a like manner.

At the time of the agreement, price levels are determined to activiate the option to purchase. The agreement time frame is usually put in terms of months, rather than weeks or years. At the end of the time frame, the agreement expires. There is a definite limit for the time allowed to trade. Calls and Puts trade in opposite directions.

An investor would designate that they will purchase Puts(stock) when the value of the stock goes down. Calls, on the other hand, are agreements to purchase when the value of the stock rises. Calls will gain value when the stock rises in price. Puts will gain value when the stock falls in price. The terms of the Calls or Puts are settled upon at the beginning of the agreement.

Both methods of trading can yield a profit for the investor. The savy investor can anticipate the moves of the market and use Calls and Puts to increase their bank account. The biggest danger is not watching the expiration date of the agreement. These date are set in stone and should one be missed, or purchases not made within the limits of the agreement, an investor risks loosing their investment.

The most important thing to remember about Puts and Calls is that the expiration date must be checked with diligence. Even small investors can use this method of trading to make money, but one should not purchase a Put on a self-owned stock.

It is more common and better advice to purchase stock after purchasing the Put if the value of that stock drops further than the purchase level designated in the Put. Purchasing a atock at a lower value than the Put will increase the chance of profit for the investor.

If anything the profit can be used to counterbalance the debit the investor may have accrued in the stock.
It is imperative to understand the limit each type of preference (Calls and Put) gives when you procure. This helps you to understand why there is rate fluctuation of the stock in the market wavy.

In summary, the Calls and Puts investment is a more advantageous mode of investment since its not limited to large cooperates and as well has a variety of open trade. Its therefore does not necessarily need a large sum of cash for one to invest in the business.

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