Deep Dive · Lesson 2
Calls and Puts
Big Idea
There are two basic types of options: calls and puts.
A call option gives the buyer the right to buy something at a set price.
A put option gives the buyer the right to sell something at a set price.
Calls are usually connected with the idea that prices may rise. Puts are usually connected with the idea that prices may fall.
| Option Type | Buyer Gets the Right To | Often Used When Someone Thinks |
|---|---|---|
| Call | Buy | The price may rise |
| Put | Sell | The price may fall |
Call Options
What Is a Call Option?
A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a set price — the strike price — before or on a certain date.
For example: you buy a call on Acme Inc. with a strike price of $50. If Acme rises above $50, your right to buy at $50 may become valuable.
Simple Call Example
Acme shares trade at $50. You buy a call giving you the right to buy 100 shares at $50. Later, Acme rises to $60. You still have the right to buy at $50 — while the market price is $60. That difference is why call options are often associated with rising prices.
Call Buyer vs. Call Seller
Call Buyer
Pays the premium. Gets the right to buy. Has a choice.
Call Seller
Receives the premium. May be obligated to sell if the buyer exercises.
Risk: Naked Call Selling
If a call seller does not own the shares, this is called a naked call. If the stock rises sharply and the buyer exercises, the seller may have to buy shares at the market price and sell them at the lower strike price. Because a stock can keep rising, the potential losses on a naked call can be extremely large — in theory, unlimited.
Put Options
What Is a Put Option?
A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a set price before or on a certain date.
For example: you buy a put on Acme Inc. with a strike price of $50. If Acme falls below $50, your right to sell at $50 may become valuable.
Simple Put Example
Acme shares trade at $50. You buy a put giving you the right to sell 100 shares at $50. Later, Acme falls to $40. You still have the right to sell at $50 — while the market price is only $40. That difference is why put options are often associated with falling prices.
Put Buyer vs. Put Seller
Put Buyer
Pays the premium. Gets the right to sell. Has a choice.
Put Seller
Receives the premium. May be obligated to buy if the buyer exercises.
Risk: Put Selling
A put seller's maximum loss is limited because a stock cannot fall below $0 — but losses can still be substantial. If you sell a put with a $50 strike and the stock falls to $20, you may be obligated to buy shares at $50 that are only worth $20. Selling puts should not be viewed as free income.
Common Beginner Mistake
- ❌ Thinking buying a put means you want to buy the stock. A put gives the right to sell.
- ❌ Thinking selling an option is the same as buying one. The buyer gets a right. The seller takes on an obligation. That difference matters a lot.
Interactive Checks
Check 1 of 7
Acme shares are trading at $50. You buy an option that gives you the right to buy Acme shares at $50.
What type of option is this?
Check 2 of 7
Acme shares are trading at $50. You buy an option that gives you the right to sell Acme shares at $50.
What type of option is this?
Check 3 of 7
You buy a call option with a strike price of $50. Later, the stock rises to $60.
Is the right to buy at $50 more useful now?
Check 4 of 7
You buy a put option with a strike price of $50. Later, the stock falls to $40.
Is the right to sell at $50 more useful now?
Check 5 of 7
You sell a naked call option with a strike price of $50. Later, the stock rises to $120 and the buyer exercises the option.
Why can this be risky for the call seller?
Check 6 of 7
You sell a put option with a strike price of $50. Later, the stock falls to $20 and the buyer exercises the option.
What obligation does the put seller have?
Check 7 of 7
A stock falls all the way to $0. You previously sold a put option with a strike price of $50.
Which statement is most accurate?
Quick Memory Tool
- Call = right to buy. Can benefit when the price rises.
- Put = right to sell. Can benefit when the price falls.
- The buyer pays the premium and has a right.
- The seller receives the premium and may have to act if the buyer uses the option.
Next Lesson
Strike price and expiration date