Understanding Put and Call Options: A Beginner's Guide

What Are Put and Call Transactions?

In the stock market, you do not have to directly buy or sell stocks to profit. You can buy or sell options. The two types of options are calls and puts.

Calls

If you buy a call, you are buying the right to buy a stock at a specified price on or before a specified date. The reason to buy a call is that you think the stock price is going up, so you want to lock in the right to buy the stock at a lower price.

Puts

If you buy a put, you then have the right to sell a stock at a specified price on or before a specified date. The reason to buy a put is that you think the stock price is going down and you want to have the right to sell the stock at a higher price.

Costs

The cost of a put or call depends on the price of the underlying stock. Call prices increase when the underlying stock price is increasing and decrease when the underlying stock price decreases. Put prices increase when the underlying stock price decreases and decrease when the underlying stock price is going up.

Exercising the Option

If you purchase or sell the underlying shares of your option, it's called exercising the option. However, you do not have to exercise options. You can resell the options to other investors.

Expiration

Put and call options expire. If you don't sell or exercise your option before the expiration date, you lose the money you paid for the put or call.