6 min
Call vs Put Options
Now that you know the key terms and the difference between buying and selling, let's clearly distinguish calls from puts and when you'd use each one.
What you'll learn
- Clearly distinguish calls from puts
- Know which direction (bullish/bearish) each one bets on
- Understand the four basic positions
Call Options
A call option gives the holder the right to buy the stock at the strike price. Calls increase in value when the stock price goes up.
Put Options
A put option gives the holder the right to sell the stock at the strike price. Puts increase in value when the stock price goes down.
The Four Basic Positions
Combining call/put with long/short gives you four basic positions:
Long Call — Bullish. Pay premium, right to buy. Limited loss, unlimited gain.
Short Call — Bearish/neutral. Collect premium, obligation to sell. Limited gain, unlimited loss.
Long Put — Bearish. Pay premium, right to sell. Limited loss, large gain potential.
Short Put — Bullish/neutral. Collect premium, obligation to buy. Limited gain, large loss potential.
Long Call — Bullish. Pay premium, right to buy. Limited loss, unlimited gain.
Short Call — Bearish/neutral. Collect premium, obligation to sell. Limited gain, unlimited loss.
Long Put — Bearish. Pay premium, right to sell. Limited loss, large gain potential.
Short Put — Bullish/neutral. Collect premium, obligation to buy. Limited gain, large loss potential.
Calls = bullish bets. Puts = bearish bets. Long = limited risk. Short = limited reward but potentially large risk.
Knowledge Check
You think a stock is going to drop significantly. Which basic position would let you profit from that drop with limited risk?
A long put. Buying a put gives you the right to sell at the strike price. If the stock drops well below the strike, the put becomes very valuable. Your maximum loss is limited to the premium paid.