Calls and Puts

Every option is either a call or a put. A call option gives its buyer the right to buy the underlying asset at the strike price. A put option gives its buyer the right to sell the underlying at the strike price. Calls gain value when the underlying rises; puts gain value when it falls. Everything else in options, from income strategies to complex spreads, is built from combinations of calls and puts, bought or sold.

Calls at a glance#

A call is a bet that the price will rise above the strike, or a way to lock in a purchase price.

Puts at a glance#

A put is a bet that the price will fall below the strike, or insurance against a decline.

Worked examples#

Break even points#

call break even = strike + premium
put break even = strike - premium

The $105 call bought for $3 breaks even at $108 at expiration; the $95 put bought for $2.50 breaks even at $92.50.

Four basic positions#

Combining buying and selling with calls and puts gives four building blocks:

Every multi leg strategy, such as spreads, straddles and condors, combines these four. See Vertical Spreads and Straddle.

Calls, puts and the underlying#

Calls and puts are linked to the underlying and to each other through Put-Call Parity: a long call plus a short put at the same strike and expiry behaves like owning the underlying. This relationship explains why traders can build "synthetic" positions. See Synthetic Positions.

A memory aid#

• Call up: you "call" the asset to you, so you want the price to rise.
• Put down: you "put" the asset onto someone else, so you want the price to fall.

Common mistakes#

• Confusing buying a put with selling a call. Both are bearish, but the risks are very different.
• Ignoring the premium when calculating break even.
• Forgetting the 100 share multiplier on US stock options.

Frequently asked questions#

What is the difference between a call and a put?#

A call gives the right to buy at the strike price and gains when prices rise; a put gives the right to sell at the strike price and gains when prices fall.

Is buying a put the same as short selling?#

Both profit from a fall, but a put buyer's loss is limited to the premium, while a short seller has no upper limit on losses if the price rises.

Can you sell a call without owning the stock?#

Yes, that is an uncovered or naked call. It carries risk with no upper limit and requires a high level of broker approval.

Next, learn how the strike price shapes every option in Strike Price.