I would like to have an explanation about your references to a put to buy versus a put to sell, and a call to buy versus a call to sell.
When we are looking at actually buying an option, we use the phrase “to buy” after the option symbol. This is language that your broker understands when you place an order. For example, today we were looking at some calls to buy on MMC from our Stock Split Report. We told our broker the following: we want to place a day order for 10 contracts of MMC July $95 call options to buy at a limit of $8.50. This lets the broker know all of the specifics of our order, and the “to buy” means we want to purchase these options. We felt the stock was going to continue its move up (it did), so we wanted to buy these call options to take advantage of the move up.
With the stock moving up, we could also have placed an order to sell the puts so we could take advantage of the move up. As a stock rises, the value of puts on the stock decreases. We could have also placed the following order: we want to place a day order for 10 contracts of June $95 MMC puts to sell at a limit of $____ (we don’t have the price because we were not looking at this play today). That way we could have sold the puts, taken in the money for the sale, and then bought them back later today when the stock was up over $8 and the value of the puts fell. Again, this is language that lets the broker know what position we want to take.
If we feel a stock is going to fall, we can sell calls on the stock (naked or covered-the latter if we own the stock) or buy puts on the stock. As for calls to sell, we often sell covered calls on our long term stock holdings when we feel the stock has reached a peak and is going to trend lower. We will sell at or slightly out of the money, near-term covered calls on those positions with the idea that as the stock falls in price, the calls will lose value as well. We then repurchase the calls to close the covered position, and our profit is the difference between the price we sold the calls for and the price paid to repurchase them. We tell our broker: we want to place a day order for 10 contracts of XYZ June $60 calls to sell at a limit of $_____ to open a covered position on 1,000 shares of my XYZ stock. When we close the position, we reverse the order: we want to place a day order for 10 contracts of XYZ June $60 calls to buy at a limit of $___ to close the covered position on 1,000 shares of my XYZ stock.
We look to buy puts as well when we think a stock is going to fall. That order is the same as buying a call option, except you say you are buying puts instead of calls.
