Calls and puts are types of options contracts in financial markets that give the buyer specific rights related to buying or selling an asset at a predetermined price within a set timeframe.
Call Options
- A call option gives the buyer the right, but not the obligation, to buy an underlying asset (such as a stock) at a fixed price called the "strike price" before the option expires.
- Buyers of call options expect the price of the asset to rise. If the market price exceeds the strike price, they can buy the asset at the lower strike price and potentially sell it at the higher market price for a profit.
- Call options require paying a premium upfront for this right.
- Sellers (writers) of call options are obligated to sell the asset at the strike price if the buyer exercises the option
Put Options
- A put option gives the buyer the right, but not the obligation, to sell an underlying asset at the strike price before expiration.
- Buyers of put options anticipate the asset's price will fall. If the market price is below the strike price, they can buy the asset cheaply on the market and sell it at the higher strike price.
- Put options can also be used to hedge existing investments against price declines.
- Sellers of put options must buy the asset at the strike price if the buyer exercises the option
Summary Table
Feature| Call Option| Put Option
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Right to| Buy an asset at strike price| Sell an asset at strike price
Buyer expects| Price to rise| Price to fall
Seller's obligation| Sell the asset if exercised| Buy the asset if exercised
Use case| Speculating on price increase or leverage| Speculating on price
decrease or hedging
In both cases, the buyer pays a premium for the option, and can choose whether to exercise it before expiration. If exercising would cause a loss, the buyer can let the option expire worthless, losing only the premium paid
