Although at Futurseguros, your insurance agency in Mallorca, we are not dedicated to offering complex financial products, we believe that it is important that our clients have all the necessary information to make well-informed financial decisions. We can help you understand the financial market and risk products, such as those we explain in this article about calls, puts and warrants, three classic options.
In summary, call, put and warrant are a right to buy or sell (they have opposite meanings) these products are also called options, a call option for example.
What is a call?
A call is a right (it does not oblige me) to buy a share at a price already fixed (shown on the call) up to a time period that is also indicated. For example, an Amazon call at 200 euros until March 2025. (I have the right to buy that share at that price until that date)
What is a put?
A put is just the opposite, it is a right (it does not oblige me) to sell a share at a price already fixed (shown on the put) until a time period that is also indicated. For example, an Amazon put at 200 euros until March 2025, I can sell that share at that price until the expiration date.
The price of both the call and the put is called the strike, for example: an Amazon put option strike 200 date 20/03/2025..
What happens if I have bought a call and the stock price goes up?
If the price of Amazon shares goes up to 250 euros and I have an Amazon call at 200, that means I am earning 50 euros, since I have the right to buy that share at 200 and in the market it is worth 250 euros, my call will be worth 50 euros, I can exercise it now (close it) and earn those 50 euros or continue holding it until the expiration of my call, but if the price of the share goes down (to less than 200 euros) just the opposite would happen, my call would go into losses and if when expiration came it was still at a loss I would simply do nothing, I would let it expire and lose the cost of what the call would have cost me, I am not risking anything else, even if the share goes down to 1 euro I only lose the cost of the call, which I already paid when I bought it.
What happens if the stock price goes up and I have a put?
If the price of Amazon shares goes up to 250 euros and I have an Amazon put at 200, it means that I am losing 50 euros, since I have the right to sell that share at 200 and in the market it is worth 250 euros, my put is at a loss and if at the expiration date it was still at a loss I would simply do nothing, I would let it expire and I would lose the cost of the put, I am not risking anything else, even if the share goes up to 500 euros I only lose the cost of the put.
However, when the share goes down, for example, Amazon shares go to 150 euros my put will be worth 50 euros, I can exercise it now (close it) and earn those 50 euros or continue holding it until expiration.
Both calls and puts are options that are used in the stock markets. The reasoning is: if I think the market is going to rise, I buy a call; if I think the market is going to fall, I buy a put. These types of instruments, like stocks, have risks, so it is best to train and be well informed before trading them and not invest capital that you need in the short term.
What is a warrant?
There is another instrument, which you may have also heard of, these are warrants. These products are less standardized and are usually created by the company that issues them. In practice, they work like a call or a put. For example: an Amazon call warrant with a strike of €200 and a 6-month maturity with a premium of €80 (the premium is what you pay). You can see that it is the same as a call or a put.
The main difference in practice between warrants and calls and puts is usually the maturities, which are usually longer in the case of warrants, and the financial leverage (if you don’t know what it is, check it out here). Be careful because this can lead to higher profits, but also higher losses. Warrants are a financial product with even more risk than traditional calls and puts.
In short, train yourself well before entering these markets. They are not for everyone. Also, use capital that you will not need in the short term. If you want to save with a certain profitability, there are more conservative and easier to understand products. If you wish, contact us.