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InvestWELL Report |
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Question: What is the difference between call and put equity options?
Answer: In short, if you own (you are long) a call option, you make money when the value of the stock goes up. Conversely, if you own (you are long) a put option, you make money when the stock declines.
A call option buyer has the right, but not the obligation, to buy a particular stock at a specified price within a specific time period (a good thing to have if a stock has gone up in price). On the other hand, a put option buyer has the right to sell a particular stock at a specified price within a specified time (a good thing to own if a stock price went down).
We believe call and put options will continue to gain popularity as more investors get comfortable using them for making profits or for hedging.
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(Cumulative %)
Chart 1.
Investment Strategy – MEMBER SECTION
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Jul 30 - Aug 5, 2006
- Last week,
the US equity markets finished almost where they started (Chart 3 & 4). At present, the markets are responding to a number of negative international political developments, as well gauging the probability of the US interest rate hike next week. The recent Labor Report (113,000 new jobs in July) appears to confirm slowing economy and, therefore, a lower probability of the interest rate hike.
 
Charts courtesy of StockCharts.com
- Last week,
the Canadian equities have managed to gain more than their US counterparts (Chart 5 & 6). The recent Canadian Labour Report was generally neutral for the markets (loss of 5,500 jobs). However, Canada has had a stellar job creation performance for quite some time (210,000 new jobs this year alone).
 
Charts courtesy of StockCharts.com
- The interest rate increases in the UK, Europe and Australia raised investors’ concerns about inflation and the upcoming slowdown in the mature markets.
- Despite lower interest rates, the number of loan applications for mortgages is at the lowest level since May 2002. Mortgage applications are down 29% in the past year, reflecting a severe slowdown in the housing market after four years of strong growth.
- In recent years, exchange-traded funds (or ETFs) have soared in popularity. Increasingly, however, new index ETFs are being based on custom-made indexes. In fact, in some cases, these new ETFs are based on indexes that operate like a traditional mutual fund. For instance, PowerShares says the indexes tracked by many of its ETFs are designed to find stocks "that have the greatest potential for capital appreciation”. We believe this development is only a disguised form of capitalizing on popularity of ETFs but does not bring anything new to the table.
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(see
explanation)– MEMBER SECTION
Charts 7 - 9: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
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B is correct. You may want to consider buying a put on the market, which is represented by the S&P 500 index. Buying a put on IBM would imply that you are taking a risk on the price change of IBM, rather than the entire market.
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Thank you for reading InvestWELL Report.
This is a non-member version of InvestWELL Report.
InvestWELLFinancial.com
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