Options (Call / Put)

Options are the trading of "the right to buy or sell a stock at a set price." Because it is a right and not an obligation, you can exercise it when it works in your favor and let it go when it does not (though the price paid for it is lost).

There are two kinds. A call is "the right to buy at a set price," so it pays off when the stock rises; a put is "the right to sell at a set price," so it pays off when the stock falls. That is why calls are commonly used as a tool for upside and puts for downside.

Options are leverage — a small amount of money producing a large effect — so a correct call can bring a large gain, while a wrong one can wipe out the entire amount paid. They are a tool with correspondingly high volatility and risk.

Institutions often use options as "insurance" rather than for speculation. Buying puts in preparation for a decline in stocks they hold can offset part of the loss from that decline (hedging).

Buying puts does not necessarily mean "betting on a decline." It may be insurance (a hedge) to protect stocks already held, so the direction is not determined without context. (That is why our 13F screens separate PUT/CALL and also show the underlying share count, reducing the misreading of these as downside bets.)

Across the market as a whole, the ratio of puts to calls (the put/call ratio) is sometimes used as a reference for gauging investor sentiment — if puts are unusually numerous, it's read as a sign that fear is running high.