Calls and puts can be bullish or bearish depending on the option type and whether you’re a buyer or seller. Buying an option gives you the right, but not the obligation, to buy or sell an underlying asset at a specified price (the strike price) on or before a future date (the expiration date).
Selling an option obligates you to buy or sell the underlying security at the option contract’s strike price. Option buyers can exercise the option any time before the expiration date, and the seller must accept the assignment per the contract’s terms.
An option’s value, or premium, is the cost to buy the option or the credit received when selling an option. You can always buy-to-close or sell-to-close the option prior to expiration to realize a profit or limit the loss. Intrinsic value and extrinsic value determine an option’s premium.
Options also allow traders to leverage their positions with less capital and lower risk than simply buying or selling stock outright because they cost much less and allow you to control a larger position size with less money invested.Â
For example, equity options control 100 shares of stock for a fraction of the cost (this is known as the contract multiplier).
The downside is that long options can quickly lose their entire value if the stock fails to move in your desired direction.
Calls and Puts overview
A call option gives you the right to buy the underlying asset. All optionable securities list calls and puts on an option chain.
A put option gives you the right to sell the underlying asset. If you exercise a put option, you must have an account type that supports short selling.
Selling a call option obligates the option writer to sell stock at the contract’s strike price at expiration if the option is exercised and they’re assigned. Selling a put option obligates the writer to buy the stock at the contract’s strike price.
When buying options, your risk is limited to the premium paid. However, when selling options, your potential loss is unlimited.
Calls vs. Puts
You can be long or short calls and puts. You are bullish on the underlying asset when you purchase a long call option. Buying a long put option means you’re bearish on the underlying asset and believe the stock price will decrease before expiration.
Conversely, selling a short call option is bearish. Selling a short put option is bullish.
Call option and put option examples
A call option gives the holder the right to buy a security at a specific price within a certain time period. For example, assume you buy the $100 strike price call option 60 days from expiration for $5.00 in stock ABC. The stock must be above $105 at expiration to realize a profit. If the stock rises to $110 within the next two months, you have the right to purchase 100 shares at $100 per share, and either hold the stock or sell at the market price.Â
You can also sell the option before expiration; you'll realize a profit if you sell it for more than $5.00. Your max loss is the initial cost of the option (-$500).
A put option gives you the right to sell stock at a specific price within a certain period of time. For example, assume you buy the $100 strike price put option for $5.00 in stock XYZ. The stock will need to be below $95 at expiration to realize a profit. If the stock drops to $90 within the next two months, you have the right to sell 100 shares of stock at $100 per share and either hold the stock or buy to cover at the market price.Â
You can also sell the option before expiration; if you sell it for more than $5.00, you’ll realize a profit. Your max loss is the initial cost of the option (-$500).
View our in-depth strategy guides for long calls, long puts, and 35 other options strategies.
Risks and Rewards for Calls and Puts
The risk and reward associated with buying calls and puts are determined by the strike price, the premium paid, and the underlying stock price. When buying an option, the maximum risk equals the premium paid. The maximum profit potential is unlimited beyond the position’s break-even price.Â
The profit potential is limited when selling naked options, and the risk is undefined if the stock moves against your position. You can always buy another option of the same type and the same expiration date to create a vertical spread. Credit spreads have limited profit potential but defined risk.
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