Calls, Puts, and Swaps

Now we're getting advanced! Today, you'll learn about more advanced ways of buying and selling stocks. Each of the following types of trades are called options. First, let's take a look at "Calls."

Calls

A call option is like purchasing a ticket that you can turn in for something at a set price later, even if the real price goes up. Imagine you find a really fun video game for $50. You've waited for the game to come out for 5 years and its finally here! The only problem is you have just $10 in your bank account. Well, if you were to buy a ticket (call option), you could lock in the $50 price tag on the game. Now imagine in the future the price of the game goes up to $70. Because you still have the ticket, you can still buy the game for the originial $50, saving $20. The key idea is that a call lets you lock in a price to buy, hoping the real price will go higher so you can get a deal in your favor.

• People buy calls when they think the price of the asset will go up (strike price).

• If the market ends up going above the strike price, then the buyer can buy at the cheaper price and sell the actual price for profit.

• If the price never hits the strike price, then you lose the small fee (ticket) you bought for the call itself.

Puts

A put option is pretty much the opposite of a call, letting you sell something at a set later price (even if the real price drops). Imagine you got a super cool baseball card worth $100. You really need the money, but you decide to keep the card because you love the player. Well, you can pay $5 for a "sell later" ticket that locks in the $100 price, even if the price falls. Imagine the cards value drops to $60. Because of the "Put", you can still sell the card for $100. The key idea of a put is that it lets you lock in a price to sell, hoping the real price will go lower so your locked in price looks better.

• People buy puts when they beleive the price of an asset will fall.

• If the market value of an asset falls below the strike price, then the buyer can sell the asset at the higher price and make a profit.

• Just like a call, if the price does not hit the strike price than the buyer will lose money on the small fee they paid for the put.

Swaps

A swap is when two or more people decide to trade an asset based on future changes. I know that sounds confusing but it is quite simple. Imagine you and your friend trade lunches every monday for a year. The entire year you are locked in and can't change it. If your friends lunch all the sudden becomes more valuable, then you get the benefit.

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