When you buy a
Bullish investors tend to purchase calls, while bearish investors tend to buy puts. For example, if you believe the price of a stock currently trading at $50 a share will rise, you might buy a call with a strike price of $52. If the stock's price rises to $55 a share at expiration, you can purchase the shares at the $52 a share, or $3 a share under market value. Keep in mind, your profit is $3 a share less the cost of the option.
Alternatively, if you believe the stock's value will decline, you might purchase a put. If you choose an option with a strike price of $52, when a stock is trading at $55, and the stock's price drops to $49 at expiration, you have the right to sell the shares for $3 a share more than market value. Again, subtract the cost of the option from any profit you make.
As the option buyer, you control the ability to exercise the contract. However, the stock might not always move in the way that you expect. Should the price move in the opposite direction, you can do nothing and let the option expire worthless, or you may sell it to prior to expiration to recover part of your purchase price.
Examples exclude transaction costs and tax considerations.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options (available at your local Scottrade branch office or from the Options Clearing Corporation at 1-888-OPTIONS or by visiting www.888options.com). All option accounts require prior approval by Scottrade. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.