What the heck are Puts and Calls?

The first FIRE Revolution Training Programme is well under way and our first intake of students have a great mix of investment knowledge.  I thought this was a good chance to cover the basic definition of Puts and Calls.

I was in London earlier this week, enjoying the sights with my family and thought I’d do a quick explainer video about Puts and Calls.

Please take a look – it’s only 2 minutes, but I think it demystifies these 2 key investments.

Calls

The easiest way to think about a CALL is that it allows the holder to BUY shares at a certain price for a specified period of time.

There are many statistics bandied around but it is generally understood that most options expire worthless. This means that the buyer of the call will usually lose their initial investment. They are banking on the odd big win to cancel out the multiple smaller losses they are likely to get.

Being the smart — income-focused — investors that we are, means that we will be the ones selling the call to the speculator. It’s a bit like being the casino instead of the gambler. And we all know that the casino always wins…

Puts

The easiest way to think about a PUT is that it allows the holder to SELL shares at a certain price for a specified period of time.

But whatever the motivation of the holder, we take the opposite side of the trade and sell the puts. Why? Because we are not in the game of speculating on the future direction of share prices.

We are interested in the far more predictable passage of time and that plays into the hands of the option sellers and is the enemy of an option buyer.

If you want to understand more about my FIRE Revolution income strategy, you can get the low-down hereBetter yet get in touch and we can have a chat.


Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.