Q:

What are calls and puts in investing?

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Quick Answer

Calls and puts are types of option contracts, explains Investopedia. A call option gives the holder the right to purchase an asset at a specific price, called the strike price, for a defined period of time. Conversely, a put option gives the holder the right to sell the underlying asset. Options can be purchased on a variety of financial assets, including stocks, exchange-traded funds, bonds, currencies and commodities.

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Full Answer

Call options are used when the investor believes the asset's price is going to rise, according to The Motley Fool. If the underlying asset fails to reach the option's strike price by expiration, the option expires worthless. If, however, the asset trades over the strike price, the call buyer may exercise the option and purchase the underlying asset at the strike price.

Put options are used when the investor believes the asset's price is headed lower, explains The Motley Fool. If the underlying asset fails to reach the option's strike price by expiration, the option expires worthless. If, however, the asset trades under the strike price, the put buyer may exercise the option and sell the underlying asset at the strike price. This effectively enters the put buyer into a short position.

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