Good Call!

Calls are simply a surrogate for buying a stock, meaning that investors buy calls when they expect a particular stock to increase in value. Call options offer you the right, but not the obligation, to buy a stock at a set price for a fixed period of time.

Call options essentially offer a way for you to participate in the upward movement of some of your favorite names with less capital. Let's look at a name from the commodities sector that's been on the lips of a lot of analysts, Peabody Energy Corp. (BTU), but keep in mind this example is only for illustrative purposes.

If you were to buy BTU stock outright on the bet that it will increase in value, you'd expect to pay around $55 per share. As an options trader, you can make the same bet for BTU's surge with a lot less money by purchasing the BTU April 55 Calls for their listed price of $5.

You get more bang for your buck with options because a single options contract controls 100 shares of the stock, so you simply multiply an option's listed price by 100 to get your total debit. In this case, you would pay out $500. To control 100 shares of BTU stock, you would have to pay $6,100. With options, you save $5,600 and still can benefit just as much from BTU's upward movement.

And just like stocks, you can generally buy as many options contracts as you wish.

Put Options Can Turn Sunken Stocks Into Treasure!

As I said above, when you know how to invest with options, you can even make money when a stock (or the market as a whole) declines by trading put options, which are the opposite of call options. Similar to a call, you can purchase a put to hold long in your trading account. The difference, though, is that a put gives you the right, but not the obligation, to sell a stock at a set price for a fixed period of time.

It's easy to see why investors would be drawn to puts. Let's look at SanDisk, a name I mentioned above, which is trading at $25. Again, this is only an example to show you how puts work.

Now if you believed that SanDisk was on its way down, you could purchase the SNDK April 27.50 Puts, which would give you the right to sell SNDK stock at $27.50 regardless of what the stock was actually trading for.

So, if SNDK sank to $22, you could exercise the option and "put" the stock to a buyer who would be obligated to pay you $27.50 for a stock that's valued at $22. That's a $5.50 profit!

To be honest, though, most options traders never do exercise their options and instead make their profit by buying and selling the options themselves before they expire. The options are valued on the markets just like stocks are, and their prices often closely fluctuate in relationship with the underlying stock.