Buying & Selling Options: Calls and Puts
Did you know you can bet on a stock rising or falling without actually owning it? That's exactly what call and put options allow you to do.
Quick Guide
Want to profit when a stock rises?
→ Buy a Call Option
Want to profit when a stock falls?
→ Buy a Put Option
Call Options: The Right to Buy
A call option gives you the right, but not the obligation, to buy a stock at a fixed price (strike price) before a certain date.
Why Buy a Call?
- You are bullish (expect stock price to go up)
- You want to control 100 shares without paying full price
- Your risk is limited to the premium you paid
- Your profit potential is unlimited (if the stock skyrockets)
Example: Buying a Call
You buy a $50 Call on Apple (AAPL) for $2 per contract.
Key Takeaway: A call buyer only loses the premium paid, but profits if the stock rises.
Put Options: The Right to Sell
A put option gives you the right, but not the obligation, to sell a stock at a fixed price before expiration.
Why Buy a Put?
- You are bearish (expect stock price to fall)
- You want to profit from a declining market
- You can hedge your existing stocks against losses
- Your risk is limited to the premium paid
Example: Buying a Put
You buy a $50 Put on Tesla (TSLA) for $3 per contract.
Key Takeaway: A put buyer profits when the stock price drops.
Selling (Writing) Options
When you sell (write) an option, you take the opposite side of the trade. You collect the premium upfront but accept obligations:
- Selling a Call → You agree to sell shares at the strike price
- Selling a Put → You agree to buy shares at the strike price
Call Seller Risk: If the stock rises sharply, you could face unlimited losses.
Put Seller Risk: If the stock crashes, you must buy it at the higher strike price.
Risk/Reward Summary
Option Moneyness: ITM, ATM, OTM
Options are categorized by "moneyness" (relationship to stock price).
Example:
If AAPL is trading at $52:
- A $50 Call is ITM
- A $50 Put is OTM
Common Option Trading Strategies
These basic options can be combined into powerful strategies:
1. Covered Call (Collect Income on Stocks You Own)
- You own the stock and sell a call
- If the stock rises, your shares get sold at the strike price
- If the stock stays flat, you keep the premium as income
2. Protective Put (Hedge Against Losses)
- You own the stock and buy a put
- If the stock drops, the put protects your downside
3. Long Straddle (Profit From Volatility)
- Buy 1 Call & 1 Put at the same strike
- Big profits if the stock moves A LOT in either direction
Why Use These Strategies?
- Covered Calls → Income Generation
- Protective Puts → Portfolio Protection
- Straddles → Betting on Big Moves
Important Considerations When Trading Options
- Time Decay: Options lose value as expiration approaches
- Liquidity: Make sure you can exit the trade when needed
- Assignment Risk: Be prepared if your options get exercised
- Volatility: Higher volatility means more expensive options