What Are Puts and Calls?
Puts and calls are the two types of options contracts available in the financial markets. Every options trade, from the simplest to the most complex, involves one or both of these instruments. A call gives you the right to buy shares at a fixed price, and a put gives you the right to sell shares at a fixed price. Together, puts and calls give traders the flexibility to profit from any market condition.
The names are easy to remember: you 'call' shares to you (buying them) or 'put' shares to someone else (selling them). Each contract covers 100 shares, has a strike price, an expiration date, and a premium. Whether you are a conservative investor generating income or an active trader seeking leveraged returns, understanding puts and calls is essential.
Calls: Right to Buy
A call option gives the holder the right to buy 100 shares of the underlying stock at the strike price on or before the expiration date. Call buyers pay a premium and profit when the stock price rises above the breakeven point (strike price plus premium). The maximum loss is limited to the premium paid, while the maximum profit is theoretically unlimited.
Puts: Right to Sell
A put option gives the holder the right to sell 100 shares of the underlying stock at the strike price on or before the expiration date. Put buyers pay a premium and profit when the stock price falls below the breakeven point (strike price minus premium). The maximum loss is limited to the premium paid, while the maximum profit occurs if the stock falls to zero.
Puts and Calls at a Glance
| Feature | Call (Right to Buy) | Put (Right to Sell) |
|---|---|---|
| You buy when... | You think the stock will rise | You think the stock will fall |
| You sell when... | You think the stock will stay flat or fall | You think the stock will stay flat or rise |
| Breakeven (buyer) | Strike + Premium | Strike - Premium |
| Max loss (buyer) | Premium paid | Premium paid |
| Max profit (buyer) | Unlimited | Strike - Premium |
| Delta range | +0.01 to +1.00 | -0.01 to -1.00 |
| Value increases when... | Stock rises, IV rises | Stock falls, IV rises |
Examples: Puts and Calls in Action
- 1Cost = $3.00 × 100 = $300
- 2Breakeven = $100 + $3 = $103
- 3Stock rises to $110: Profit = ($110-$100-$3) × 100 = $700 (233%)
- 4Stock stays at $100: Loss = $300 (100%)
- 5Stock drops to $90: Loss = $300 (same, cannot lose more than premium)
- 1Cost = $2.75 × 100 = $275
- 2Breakeven = $100 - $2.75 = $97.25
- 3Stock drops to $90: Profit = ($100-$90-$2.75) × 100 = $725 (264%)
- 4Stock stays at $100: Loss = $275 (100%)
- 5Stock rises to $110: Loss = $275 (same, cannot lose more than premium)
Buying vs Selling Puts and Calls
There are four fundamental options positions: buy a call, sell a call, buy a put, and sell a put. Buyers pay premiums and have limited risk with potentially large rewards. Sellers collect premiums and have limited profit potential with potentially large risk (especially naked sellers). Most successful options traders use a mix of buying and selling, often through spreads that define risk on both sides.
How Time Decay Affects Puts and Calls
Time decay (theta) erodes the value of both puts and calls as expiration approaches. This means option buyers lose money each day even if the stock price does not change. The rate of decay accelerates in the final 30 days before expiration. For at-the-money options, theta is largest because they have the most time value to lose. This is why many professional traders prefer to sell options rather than buy them, collecting premiums as time decay works in their favor.
Every day that passes, your puts and calls lose value due to time decay, even if the stock moves in your direction. Buy options with enough time for your thesis to play out, and consider closing positions before the final 2 weeks when theta accelerates sharply.