Call option vs put option
A call option is the right, not the obligation, to buy something later at a price fixed today. A put option is the right, not the obligation, to sell something later at a price fixed today. Both cost a premium upfront, which is lost whether or not you use the right.
Call option and Put option side by side
| Call option | Put option | |
|---|---|---|
| What it gives you | The right to buy at the strike price | The right to sell at the strike price |
| An obligation? | No; a right can be walked away from | No; a right can be walked away from |
| Cost to hold | A premium paid upfront, never returned | A premium paid upfront, never returned |
| Useful when the price | Ends above the strike by more than the premium | Ends below the strike by more than the premium |
| Break-even at expiry (bought) | Strike plus premium | Strike minus premium |
| Most you can lose (bought) | The premium | The premium |
A booking fee for a price
Think of a small booking fee you pay to hold a price while you decide whether to go ahead. That fee is close to what a call or a put gives you: a price fixed today, time to decide, and a cost you pay whether or not you use it. You are buying a choice, and the price of that choice is real money, spent the same day.
Strike, expiry and premium
Both contracts have three edges. The strike price is the level at which you may choose to buy or sell. The expiry date is the deadline: after it passes the right disappears, used or not. The premium is the upfront price of holding the right, and it is gone the moment you pay it.
Which way each one pays
A call pays when the price ends high above the strike, since you can buy at the lower strike. A put pays when the price ends low below the strike, since you can sell at the higher strike. In both cases the price has to move far enough to cover the premium before the trade is in profit.
The payoff picture
A payoff diagram maps every if-this-happens-then-this-is-your-result case. For a bought option the loss is capped at the premium, however far the price moves the wrong way. Find the break-even and the maximum loss before you look at the profit potential. Maetis does not give trading advice.
One call and one put (hypothetical numbers)
A stock trades at ₹500 and you pay ₹15 for a call, the right to buy it at ₹500 next month. A month later it has fallen to ₹470, so buying at ₹500 makes no sense. You let the right lapse and lose the ₹15, but you never had to buy at the higher price.
A different stock trades at ₹500 and you expect it to fall, so you pay ₹8 a share for a put, the right to sell 10 shares at ₹500. The stock ends above ₹500, so you let the right lapse, and your cost stays ₹80.
Common questions
- What is the difference between a call and a put?
- A call is the right to buy at a fixed price later. A put is the right to sell at a fixed price later.
- Do I have to use an option?
- No. Both are rights, not obligations. You can leave the right unused and lose only the premium.
- What is the premium?
- The upfront, non-refundable price you pay to hold the option's right.
- How much can I lose on a bought option?
- The premium, however far the price moves against you.
Related terms
This page compares ideas and does not recommend either one. Maetis does not give investment, tax or legal advice.