puts and calls (redirected from Option (finance))

puts and calls, in securities trading. A call is a contract that gives the holder the right to purchase a given stock at a specific price within a designated period of time. It is the opposite of a put, which is a contract that allows the holder to sell a given stock at a specific price within a designated period of time. Puts and calls are both types of privileges, or options, that add flexibility to the securities market. In return for a put or call, the investor pays a fee to the potential buyer or seller of the stock (the maker), who, in turn, pays a commission to the broker who brought the two parties together. Calls are generally used by investors who want to profit from a rise in stock prices but, at the same time, want to avoid sharp losses. Thus, an investor holding a call chooses one of two options. If the market advances he can buy the designated security at the lower price quoted in the call, and then sell the stock at a profit. If the market declines, he can simply exercise his option not to buy the stock, thereby avoiding a major loss, the only expense being the cost of the option. A put is used by investors seeking to profit from a fall in stock prices. For example, an investor holding a put for a stock that declines in price is able to sell the stock at the higher price quoted in the put, thereby profiting by the amount the stock declines from the put price; if the stock price rises the investor can lose only the money used to purchase the put option. Puts and calls are generally written for one, two, three, or six months, although any period over 21 days is accepted by the New York Stock Exchange. A straddle and a spread are combinations of puts and calls occasionally used by sophisticated investors. In a more generalized sense, the term call may refer to any demand for payment.

Bibliography

See P. Sarnoff, Puts and Calls: The Complete Guide (1970); L. Engel, How to Buy Stocks (5th rev. ed. 1971).