2. Purchasing Puts and Calls

Simply stated, purchasing a call is a directional bet with higher leverage than an equivalent stock purchase. Purchasing puts is equivalent to shorting stock. Long puts and calls have many advantages over stock. Most notable is the flexibility to use different strike prices and expiration dates to accommodate a variety of expectations for the performance of the underlying stock. “Bullish” and “bearish” are broad terms, and the simple purchase or short sale of a stock does not adequately represent all bullish or bearish views. Suppose, for example, that you believe a stock might suddenly rise sharply as the result of an impending news event. That expectation is much different from a long-term somewhat positive view ...

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