Call vs Put

Options

The first thing all new options traders learn is the difference between call vs put options. There are major differences between the two – and one similarity: Options traders can buy and sell both for profit.

Option Call vs Put

A call option is a trading contract that gives you the right, but not the obligation, to buy the underlying asset (stock/index) at a specified price (strike price) during a fixed period of time (until expiration).

A put option is a trading contract that gives you the right, but not the obligation, to sell the underlying asset (stock/index) at a specified price (strike price) during a fixed period of time (until expiration).

Call options increase in value when the price of the underlying asset rises, while put options increase in value when the price of the underlying asset falls.

Explaining Options Trading: Important definitions

Before we continue, let’s define a couple of important terms: expiration and “moneyness”.

Monthly options generally expire (or become worthless) at the close of trading on the third Friday of the month. Weekly options also expire on Fridays, but unlike monthly options, strike prices are opened each week (or even weeks in advance). Some exchange traded funds (ETF’s) expire each quarter, which may not be on a Friday.  

Options that are “in the money” have intrinsic value (the difference between the strike and stock price). A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.

Making Money: Call vs Put Options

 

If a call option is in the money at expiration, the underlying stock/index will be “called away” from the seller. The buyer will have the right to convert her option into stock at the strike price (which could be lower than the current price).

If a put option is in the money at expiration, the underlying stock/index will be “put” to the seller. The seller is now obligated to take the shares.

Options are often exercised when they are deep in the money (there is a big difference between the strike and stock price). Options that are at the money or slightly in the money can be exercised but only as the expiration date approaches.

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