What Are Call and Put Options?

Call and put options are derivative investments, meaning their price movements are b*ased on the price movements of another financial product. The financial product a derivative is b*ased on is often called the "underlying." Here we'll cover what these options mean and how traders and buyers use the terms.

What Are Call and Put Options?

Options can be defined as contracts that give a buyer the right to buy or sell the underlying asset, or the security on which a derivative contract is b*ased, by a set expiration date at a specific price.

Puts and calls can also be written and sold to other traders. This generates income but gives up certain rights to the buyer of the option.1

How Call Options Work

For U.S.-style options, a call is an options contract that gives the buyer the right to buy the underlying asset at a set price at any time up to the expiration date.2

Buyers of European-style options may exercise the option— to buy the underlying—only on the expiration date. Options expirations vary and can be short-term or long-term.

With call options, the strike price represents the predetermined price at which a call buyer can buy the underlying asset. For example, the buyer of a stock call option with a strike price of $10 can use the option to buy that stock at $10 before the option expires.1

What the Call Buyer Gets

The call buyer has the right to buy a stock at the strike price for a set amount of time. For that right, the call buyer pays a premium. If the price of the underlying moves above the strike price, the option will be worth money (it will have intrinsic value). The buyer can sell the option for a profit (this is what many call buyers do) or exercise the option (receive the shares from the person who wrote the option).3

What the Call Seller Gets

The call writer/seller receives the premium. Writing call options is a way to generate income. However, the income from writing a call option is limited to the premium, while a call buyer has theoretically unlimited profit potential.4

Calculating the Call Option's Cost

One stock call option contract actually represents 100 shares of the underlying stock. Stock call prices are typically quoted per share. Therefore, to calculate how much it will cost you to buy a contract, take the price of the option and multiply it by 100.4 

Call options can be in, at, or out of the money:

How Put Options Work

Put options are the opposite of call options. For U.S.-style options, a put options contract gives the buyer the right to sell the underlying asset at a set price at any time up to the expiration date.2 Buyers of European-style options may exercise the option—sell the underlying—only on the expiration date.

Here, the strike price is the predetermined price at which a put buyer can sell the underlying asset.1 For example, the buyer of a stock put option with a strike price of $10 can use the option to sell that stock at $10 before the option expires.

What the Put Buyer Gets

The put buyer has the right to sell a stock at the strike price for a set amount of time. For that right, the put buyer pays a premium. If the price of the underlying moves below the strike price, the option will be worth money (it will have intrinsic value). The buyer can sell the option for a profit (this is what many put buyers do) or exercise the option (sell the shares).3

What the Put Seller Gets

The put seller, or writer, receives the premium. Writing put options is a way to generate income. However, the income from writing a put option is limited to the premium, while a put buyer can continue to maximize profit until the stock goes to zero.4

Calculating the Put Option's Cost

Put contracts represent 100 shares of the underlying stock, just like call option contracts. To find the price of the contract, multiply the underlying's share price by 100.

Put options can be in, at, or out of the money, just like call options: