Difference Between Call Option and Put Option
Basis |
Call Option |
Put Option |
---|---|---|
Right Granted | The right to purchase the underlying asset at a predetermined strike price. | The option to sell the underlying asset at the strike price specified. |
Position Holder | Call buyer holds the option. | Put buyer holds the option. |
Objective | Profit from potential upward price movement. | Profit from potential downward price movement. |
Obligation | No obligation to buy. | No obligation to sell. |
Risk and Reward | Limited Risk | Limited Risk |
Leverage | Offers potential leverage, allowing control of a larger position with a smaller upfront investment. | Offers potential leverage, allowing control of a larger position with a smaller upfront investment. |
Market Outlook | Bullish outlook | Bearish outlook |
Closing the Position | Can sell the call option before expiration to realize profits or cut losses. | Can sell the put option before expiration to realize profits or cut losses. |
Premium Payment | Call buyer pays a premium to the call seller. | Put buyer pays a premium to the put seller. |
Strike Price Importance | The lower the market price compared to the strike, the more valuable the option. | The higher the market price compared to the strike, the more valuable the option. |
What is Call Option & How it Works?
Financial contracts known as call options grant the buyer the right, but not the obligation, to purchase a stock, bond, commodity, or other asset or security at a given price within a predetermined window of time. If the buyer exercises the call, the call seller is required to sell the asset. When the price of the underlying asset rises, the call buyer benefits. There are several reasons why share prices might rise, including good company news and acquisitions. Since the buyer usually does not execute the option, the seller benefits from the premium if the price falls below the strike price at expiration. One way to compare a call option with a put option is that the former allows the holder to sell the asset at a predetermined price to the buyer on or before the option’s expiration, while the latter does the opposite.
Geeky Takeaways:
- A call is an option contract that grants its owner the right, but not the obligation, to purchase the related securities within a specific period and at a given price.
- Its expiration, also known as the time to maturity, is the stated period during which the sale may be made. The specified price is known as the strike price.
- The premium, which is the maximum amount you can lose on a call option, is the cost you pay to purchase the option.
- Call options can be bought for trading purposes or sold to manage taxes or income.
- In spread or combination strategies, call options can also be combined.
Table of Content
- How do Call Options Work?
- What is the Expiration of Call Options?
- What Happens after Expiration?
- Difference Between Long Call Options and Short Call Options
- How to Buy a Call Option?
- How to Sell a Call Option?
- How to Calculate Call Option Payoffs?
- When Should You Buy or Sell a Call Option?
- Call-Buying Strategy
- Call Option Examples
- Difference Between Call Option and Put Option
- Frequently Asked Questions (FAQs)
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