Buying a call is the most basic options trading strategy that you can utilize when expecting an upward price movement in a particular stock. There are many different methods for choosing an underlying security, but when you buy a call, you are essentially saying that you believe that the underlying stock's value will increase before the option's expiration date.

A couple of things to keep in mind when buying calls:

• Options closer to expiration will cost less but also have less time to make the desired price move.
• In-the-money options may be more expensive than out-of-the-money options, but out-of-the-money options have no intrinsic value, only time value.

Here's a hypothetical call buying scenario:

Let's say that today you're feeling fairly bullish about XYZ Inc. Whether your indicators stem from market analysis or a gut feeling, you believe that although XYZ is currently trading at 46.75, it will assuredly climb above 50 by June expiration. As such, you buy an XYZ June 50 call.

Now, let's say that by the middle of May, XYZ is trading at 50.25. At this point, your XYZ call option is in-the-money. You may either sell the option at current market value, which should net a nice profit, or you can hold on to it a bit longer to see if your option continues to run for a potentially unlimited gain.

If, on the other hand, XYZ does not climb above 50, you still only lose your initial investment.

Just as buying calls is the most basic options trading strategy you can employ when expecting upward movement in a stock, put buying is the most basic options trading strategy at your disposal when you expect a stock's value to drop. By purchasing a put, you are investing in the belief that a particular security's value will fall below a certain price by the option's expiration date.

Here are a couple of things to keep in mind when buying puts:

• Puts can allow you to profit from a downward move in an equity.
• Since you are buying an option, you have the right, though not the obligation, to sell the underlying shares at the strike price. Thus, you do not have to own the shares to buy a put. Only if you exercise your put option would you have to go out in the open market, buy the shares, and then sell the stock at the contract (strike) price. Bear in mind that you will incur two stock commissions - one to buy the shares and one to sell them to the put seller.
• The simplest alternative to capture a profit is to sell the put for a gain after a decline in the stock.

If you exercise a put, you end up either with a short stock position or no stock position. A short stock position results if you sell the stock at the put strike but don't own the shares. You end up with no stock position if:
1) you already owned the shares (in other words, the put you bought was for protection, also known as a "married put") and you sell them at the strike price, or
2) you didn't own the shares (in other words, you bought the put for speculation) and you decide to go out and buy the shares and then sell them at the strike.

Some investors might tend to shy away from puts, preferring instead to short the stock. Put buying is a limited-risk alternative to short selling, because it provides a stake without the added cost of margin. Purchasing puts also frees the trader from paying dividends, which is required of the short seller.

Let's look at a hypothetical put buying scenario. You feel very bearish about XYZ Inc. Your indicators may result from market analysis or simply a gut feeling, but either way, you are certain that XYZ, which is currently trading at $50, will decline below $45 within two months. Your course of action is either to short the stock at $50, or buy an XYZ 50 put that expires in two months at a cost of $5.

The following table shows the profit and loss of these two strategies at various stock prices at expiration. Note that the short position is more profitable by the amount of the put's premium (5 points) as long as the stock stays flat or moves lower. Above $50, the put position has reached its maximum loss point at 5, while the short position continues losing at a linear rate. At $55, both positions are saddled with a loss of $5, while above $55, the short sale incurs a larger loss than the put purchase.