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Calls and Puts

Options trading uses terms such as calls and puts. In today’s article we discuss some of these terms and what they mean.

Call – a call is an options contract that gives the buyer the right to exercise an option and to buy an underlying commodity at the strike price. The buyer can do this up to or on the expiration date of the contract.

Options traders can either go long on a call, or they can be short on a call. When learning about calls and puts as it relates to options trading, you will understand what it means to be long or short (see selling short). When an options trader is long on a call then it means that he or she bought a call contract, and they have the right to exercise that contract. If a trader is short a call, this means they have sold a call contract, then he or she may be required to sell the underlying commodity if they are chosen by the exchange to complete their contractual obligations.

Covered call – a covered call is an options trading strategy where the investor holds a long position in an asset and then sells the call options on the same asset with the goal of generating additional income from the asset. The investor typically holds the asset long and at the same time he or she will have a short position through the option in order to generate income from the option premium.

Puts – a put is also an options contract, but it gives the buyer the right to sell the underlying commodity at the strike price on or at any time up until the contract expires. An options trader can be long a put, meaning he or she bought a put contract, and then he or she has the right to exercise the contract. Again, as with calls, puts can also be short or long.  When selling puts, if a trader is short a put, then he or she sold a put contract and may then be required to buy the underlying commodity if they are chosen by the exchange to complete contractual obligations. Conversely, an options trader can long a put, which means that he or she bought a put contract and has the right to exercise the contract.

As you learn about options trading and calls and puts you will find there is a lot more terminology that you should learn. You will come across terms such as bear call spread, bear put spread, bull call spread, and bull put spread. There are many more terms that you should become familiar with as well. Continue to research different options trading strategies and continue your education on the options market to see if it is the right market for you.

Market Direction: Another huge built-in advantage of candlestick analysis is the "calming of the nerves."  How many times have you come out of a trade too early because you did not know whether the uptrend could continue? Knowing the signals and the patterns allows a candlestick investor to maintain positions without being  a nervous Nellie. What should happen after witnessing a Cradle pattern? The expectation of a strong uptrend! When holding positions in a strong uptrend, there is a tendency to take profits, even when there is no indication that it is time to take profits. Why? Fear! Many investors become very fearful that if they hold a position too long, they may give back to a substantial portion of their profits.

Controlling one's emotions is the hardest aspect of investing. The more you understand the expected results of the candlestick signals and patterns, the less your emotions will come into play. Investing should be a pleasant experience, not a stressful one. One of the beneficial factors of candlesticks is knowing they work an extremely high percentage of the time. Once an investor becomes comfortable with that fact, they can establish a trading program that does not involve a lot of anxiety. If you wake up in the morning very anxious about your portfolio positioning, it can be assumed you are not positioned correctly. That should be your first alert. The next step should be to analyze the positions and close those that do not look like they are working correctly. This may seem like a very simplistic trading practice but it is based upon the commonsense elements built into candlestick analysis. Remember to take profits when it is the appropriate time to take profits. As the Japanese Rice traders profess, "let the market tell you what the market is doing." You will have a much better sense of what the market is conveying when you know what should occur after each signal or pattern.




Good investing,

The Candlestick Forum Team

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