Difference Between Call and Put Option

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  • 04 Dec 2023

Key Takeaways

  • Call options provide the right to buy an asset. Traders buy call options when they anticipate a rise in the asset price.

  • Put options offer the right to sell an asset, Traders buy them when they anticipate a decline in asset price.

  • Call options are suitable for the bullish markets. However, put options are preferred in bearish markets.

  • Profits from call options may be unlimited. However, you will get limited profits with put options.

  • When call options are in-the-money the strike price is lower than the spot price. However, the strike price is higher than its spot price when the call option is out-of-money. This is the opposite for the put options.

With a call option, you get the right (but no obligation) to purchase a stock at a pre-specific price (strike price), before a specified expiration date. Traders usually buy call options when they expect the price of the underlying asset to increase. When the asset price goes above the strike, the holder can buy the asset at a low price. Thus he gets the asset at a lower price than the existing market price.

With a put option you have the right, without any obligation, to sell a particular asset, frequently a stock, at a predetermined strike price before a specified expiration date. Essentially, put options provide investors with a strategic advantage, enabling them to profit from a potential decline in the stock's market price. When the market price goes below the strike price, the holder can sell the asset at the higher strike price, thus reaping a gain.

Here are the differences between call and put options on various aspects:

Aspect Call Option Put Option
Profit Direction
Expects the underlying asset's price to rise.
Expects the underlying asset's price to fall.
Right to buy/sell
The right to buy the asset at the strike price.
The right to sell the asset at the strike price.
Obligation to Exercise
No obligation to buy the asset.
No obligation to sell the asset.
Risk and Reward
Limited risk (premium paid) with unlimited reward potential.
Limited risk (premium paid) with limited reward potential.
Market Outlook
Preferred in bullish markets.
Preferred in bearish markets.
Market Behavior
Value increases as the underlying asset's price rises.
Value increases as the underlying asset's price falls.
Profit Timing
Profits realised when the asset's price exceeds the strike price.
Profits realised when the asset's price falls below the strike price.
In-the-money
Strike price less than Spot price
Strike price higher than Spot price
Out-of-the-money
Strike price higher than Spot price
Strike price less than Spot price
Seller break-even
Strike price + premium received
Strike price - premium received

Conclusion

Call option and put option hold a place of significance in the investor's toolkit, allowing for a nuanced approach to market dynamics. Mastering these essential derivatives equips individuals with the flexibility to adapt to changing circumstances, ensuring they can navigate the financial landscape with confidence and agility.

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FAQs on difference between call and put option

A call option grants the holder the privilege to purchase an underlying asset or contract at a predetermined price in the future, with the price being determined today. Conversely, a put option bestows the holder with the right to sell an underlying asset or contract at a fixed price in the future, with this price being established today.

Regarding profitability, call options offer unlimited profit potential since there is no upper limit on a stock's price. In contrast, put options have restricted profit potential as the price of a stock cannot fall below zero.

If there is a greater demand for put options compared to call options, it suggests a looming bearish market sentiment. Conversely, when call options are in higher demand than put options, it hints at a potential bullish market outlook in the near future.

Choosing between call and put option depends on your trading strategy. Investors can use a call option if they expect the asset’s price to rise. Call options may offer unlimited profits as there is no upper limit on the asset’s price. Conversely, investors can use a put option if they expect the asset’s price to fall. Put options offer limited profits as the price of an asset cannot fall beyond a certain level.

You should evaluate the market conditions and consider the volatility of assets while buying put or call options. Also, keep in mind your risk appetite.

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