Call Options vs. Put Options

You are probably wondering what is the difference between a call option and a put option, you probably also want to know what option to do when trading, whether you should call or put an option.

Before you trade options, you should first know what it’s all about. You have to know about options, a call option, put option and also the different styles to exercise options.

To begin with, options are simply contracts between two parties, the option holder and the option issuer or option writer. The option holder or the buyer and the option writer or seller does not have the obligation to buy or sell shares at a specified price but he or she has the right to buy or sell the option on or before the expiry date. To obtain this right, the option holder or buyer pays a premium or an initial fee to the option writer or seller of the contract.

Call options and put options are the two types of options available. Each has its pros and cons and also has its own risks.

In call options, it gives the option holder or buyer the right, but not the obligation to buy shares at a specified price on or before an expiration date. Here is an example, if a company shares have a specified last sale price, you will have the right, but not the obligation to buy a specified number of shares for a lower price than the last sale price of the share at any time until the expiration date. To obtain this right, you should pay a premium or purchase price to the writer of the option. You should remember that you should exercise the option on or before the expiration date. Keep in mind that the option holder is not obligated to exercise the option.

In put options, it gives the option writer or seller the right, but not the obligation to sell shares at a specified price on or before an expiration date. Here is an example, as a seller, you have the right, but not the obligation to sell a specified number of shares for a specified price at any time on or before the expiration date. In order to obtain this right, the option holder or buyer will pay you a premium or purchase price pf the put option. You should also remember that you are not obliged to exercise the option.

Here is a simpler view of both types of option:

Call Option

• Buyer receives the right to buy shares at the exercise price in return for paying the premium to the writer.
• Writer receives and keeps premium but now has the obligation to deliver shares if the taker exercises.

Put Option

• Buyer receives the right to sell shares at the exercise price in return for paying the premium to the writer.
• Writer receives and keeps premium but now has the obligation to buy the underlying shares if the buyer exercises.

There is little risk for the option holder or buyer. This is because he or she will not lose more than the initial payment paid as he or she can cancel the option. On the other hand, the writer’s risk is unlimited. This is because his or her loss in a put option is the same as the strike price.

In conclusion, you should be knowledgeable about the risks involved in option trading. It is also wise that you should first learn about the options market before you start trading.