Options: Calls & Puts

Introduction

An option gives the holder the right, but not the obligation, to buy or sell an asset at a set price within a certain time. This lesson covers the two basic types — calls and puts — and how they work.

Call Options

A call option gives the buyer the right to buy the underlying asset at a set price (the strike price) by a certain date.

• Useful if you expect the price to rise
• You profit if the price rises above the strike by more than the premium

Put Options

A put option gives the buyer the right to sell the underlying asset at the strike price by a certain date.

• Useful if you expect the price to fall (or to protect a position)
• You profit if the price falls below the strike by more than the premium

Premiums

Buying an option costs a premium — the price of the option itself. This is your maximum loss as a buyer.

Buyer max loss = the premium paid
Buyer profit    = (price move) - premium

Rights vs Obligations

• Buyer of an option has the right to exercise — but no obligation
• Seller (writer) of an option has the obligation to fulfill if the buyer exercises

Why Options Are Used

• Speculation — bet on direction with limited risk (buyer)
• Hedging — protect a portfolio (buying puts as insurance)
• Income — selling options for premium (advanced)

Summary

• Call = right to buy at a set price by a date
• Put = right to sell at a set price by a date
• Buyers pay a premium; max loss = premium
• Buyers have rights; sellers have obligations
• Used for speculation, hedging, and income

Next Lesson

Beyond stocks and bonds: alternative assets.