Wikipedia:Reference desk/Archives/Miscellaneous/2015 June 26

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June 26

Options simplified?

Can someone explain calls and puts to me? I need to know it for a class and nothing I look up is clicking. 2001:5B0:2966:81B8:C32:D0A7:2574:1298 (talk) 02:11, 26 June 2015 (UTC)

It is explained in the very first paragraph of this article: Option (finance). Joseph A. Spadaro (talk) 04:28, 26 June 2015 (UTC)

It is further explained in more detail in these two articles: call option and put option. Joseph A. Spadaro (talk) 04:29, 26 June 2015 (UTC)

A call lets you buy a stock at a certain price at some time in the future: for example, to buy Microsoft for $40 in one year. You get this price no matter what Microsoft is actually trading for in one year, so if it's trading for $50, you can buy it for $40 and immediately sell it, making $10. You have to pay to lock in the price, though: that's the option premium. And of course, if Microsoft goes down to less than $40, you lose money because you've already paid this premium (there's no point in buying a stock for $40 when you can buy it for less than that). So, the question is, how much should the premium be? How much should you pay for the right to buy a stock at a fixed price at a later date? This is where all the difficult math comes in, all of which (in one way or another) tries to estimate the probability that Microsoft will be trading at more than $40 one year from now, then calculate an expected return on investment, and discount this back to the present. Puts let you sell instead of buy, so they reverse the logic. Hope this helps. OldTimeNESter (talk) 20:28, 30 June 2015 (UTC)