Bitcoin
BTC$41 312.94

-1.79%

Ethereum
ETH$3 057.90

-4.13%

Tether
USDT$1.000957

0.03%

Binance Coin
BNB$454.95

-4.03%

Cardano
ADA$1.37

-11.53%

USD Coin
USDC$0.999548

-0.04%

Basics of Options Trading: Understanding Put vs Call Option


January 2022

A popular tool for speculation is options trading, where money can move fast, and traders can gain (or lose) their stakes quickly. But what are options contracts, and what do you do with them? Options trading is an advanced strategy that can help investors participate in stock market activity, lower risks, and plan properly. To become an options holder, it's vital to know the difference between the two derivatives or two types of options for investment: put vs call options.

A popular tool for speculation is options trading, where money can move fast, and traders can gain (or lose) their stakes quickly. But what are options contracts, and what do you do with them?

Options trading is an advanced strategy that can help investors participate in stock market activity, lower risks, and plan properly. To become an options holder, it's vital to know the difference between the two derivatives or two types of options for investment: put vs call options.

What Are Call Options, and How Do They Work?

A call option is a type of contract that gives investors the right (but not the obligation) to buy bonds, stocks, commodities and other securities at a set price or spot price. Not only does the contract have a certain price (also called "strike price"), but there is also a defined due date (referred to as "exercise date" or "expiration date"). The buyer pays a small amount of premium with the expectation that the price will rise in a certain time frame. The call option contract is sold in 100 shares of stock, and the option ceases to exist after the exercise date. You can sell or buy call options depending on your expectation of how the price of the underlying asset will move. It's up to you to let it expire or sell the option contract before that happens.

Remember: If you're a buyer of a call option, you're not obligated to execute the option. If the stock price increases, you can sell the contract itself or execute it. If the price doesn't increase, you can opt to let the contract expire to lose only the premium you paid.

If you're the call writer or seller, you're writing a call option to receive the premium. However, if you get income, it will only be limited to the premium. There are two ways of selling call options:

There are three phrases you need to know about when dealing with call options:

Call Option Example

To better understand how call options work, here's a simple example. Imagine you have a house near undeveloped land. Since you'll be moving to a new place, you put the house up for sale for $100,000. Buyer A wants to buy the house but will only have $100,000 after the month. Buyer A asks you to remove the house from the market and essentially reserve it for them in exchange for $2,000.

In this story, the $100,000 is the strike price, and the $2,000 is the premium. If Buyer A buys the house, you'll get the $100,000 on top of the $2,000. If Buyer A doesn't buy the house, you'll get to keep the $2,000.

For a more fitting analogy, consider the following example for the next sections: A company's strike price in May is $100 with a premium of $10. Its expiration date is in November. 

Call Option Calculation

How can you identify your call option for a profit or loss? You start with the underlying security's price and subtract the option premium, the strike price, and other transaction fees. You will then arrive at the intrinsic value.

Pros and Cons of Call Options

Pros

Cons

Good choice if you expect a stock's price and value to rise significantly before the expiration date.

If the stock market finishes below the strike price on or before the expiration date, you will lose the premium you paid.

Call buyer: Small upfront cost for a significant gain until the option expires.

Call seller: Income limited to the premium.

Covered call option: Make risk-free money

Naked call option: No limit to potential losses incurred.

What Are Put Options, and How Do They Work?

A put option is a contract where an investor has the right to sell a stock at a specific price at or until the expiration date. An investor in the put option expects the underlying price per share of stock to drop lower than the strike price. With put options, the strike price is the fixed and predetermined price that a put buyer can sell the underlying asset.

The value of put options increases if the stock price goes down. So, if the price of stocks becomes low, you can sell your put option. However, if the stock price doesn't come down, you can let your contract expire.

Remember: The breakeven point of a point option is the difference between the strike price and the premium.

Put Option Example

To give you an example of a put option, imagine XYZ stocks trading at $400 per share. If you think it is overvalued, you'll buy a put option with a strike price of $350 and an expiration date of three months. The premium costs $10 per share, which is $1,000 if multiplied by 100 shares.

Put Option Calculation

Here's how to calculate the intrinsic value of the example above: $350 Strike Price - $10 Premium = $340 Breakeven Point 

The breakeven point is $340. If XYZ plummets to $300, your profit could be $40 per share or $4,000 in total on your put option. However, if the stocks don't drop to $350, you can let the premium expire.

Pros and Cons of Put Options

Pros

Cons

Decent returns if market prices go below the strike price.

You might lose the premium paid if the stock price goes up or stays the same.

It can safeguard you against falling prices in a volatile stock market.

You'll need to pay a bigger premium than call profit.

Put vs Call Options

Trading strategies in options can be risky. To further understandput vs call options, read the chart below for comparison:

Put vs Call Options

Put vs Call Options

 

Put Option

Call Option

Buyer of options has the right to:

Sell the underlying security at the strike price on the expiration day.

Purchase or buy the underlying security at the strike price on the expiration day.

The investor gets profit when:

The price or amount of underlying security is lower than the strike price.

The price of the underlying security is higher than the strike price.

The investor loses when:

The price of the underlying security is higher than the strike price.

The price of the underlying security is lower than the strike price.

Conclusion

Overall, your best move when investing in put vs call options is to be a buyer. This way, the most you can lose in options trading is the premium you paid for the option. The results will vary depending on the stock market. Selling a put vs call option can have the most risk but can also generate output that is worth your investment. Make sure to weigh all circumstances before taking a decision. 

If you're already a buyer of a stock, options can be one of the investment vehicles to build, hedge and protect your financial product portfolio. However, it will require serious effort on your part so you can fully understand and utilise these tools to your advantage. When options trading is done right, options will be a highly valuable addition to your investment portfolios.

FAQ

Top Cryptocurrencies with Price Predictions

# Crypto Prediction Accuracy CVIX Price 24h 7d Market Cap 7d price change
1 Bitcoin (BTC) BTC Bitcoin predictions 72.4% 61 $41 312.94 -1.79% -2.97% $782 208 393 376 BTC 7 days price change
2 Ethereum (ETH) ETH Ethereum predictions 65.6% 74 $3 057.90 -4.13% -4.99% $364 557 204 266 ETH 7 days price change
3 Tether (USDT) USDT Tether predictions 92.8% 1 $1.000957 0.03% 0.07% $78 389 539 616 USDT 7 days price change
4 Binance Coin (BNB) BNB Binance Coin predictions 71.6% 61 $454.95 -4.03% -0.74% $75 119 228 033 BNB 7 days price change
5 Cardano (ADA) ADA Cardano predictions 71.2% 51 $1.37 -11.53% 13.83% $45 869 836 376 ADA 7 days price change
6 USD Coin (USDC) USDC USD Coin predictions 90.8% 1 $0.999548 -0.04% -0.05% $45 742 193 035 USDC 7 days price change
7 Solana (SOL) SOL Solana predictions 62.8% 81 $134.45 -3.98% -3.06% $42 237 959 711 SOL 7 days price change
8 XRP (XRP) XRP XRP predictions 66.8% 64 $0.728701 -3.80% -4.17% $34 732 162 139 XRP 7 days price change
9 Terra (LUNA) LUNA Terra predictions 69.6% 57 $76.09 -1.12% 0.67% $27 219 693 512 LUNA 7 days price change
10 Polkadot (DOT) DOT Polkadot predictions 72% 51 $23.84 -5.97% -7.36% $23 544 579 275 DOT 7 days price change
11 Dogecoin (DOGE) DOGE Dogecoin predictions 77.6% 46 $0.160728 -5.76% 5.59% $21 323 857 260 DOGE 7 days price change
12 Avalanche (AVAX) AVAX Avalanche predictions 62.4% 79 $81.61 -6.07% -9.81% $19 942 092 907 AVAX 7 days price change
13 SHIBA INU (SHIB) SHIB SHIBA INU predictions 68.8% 63 $0.000027 -4.93% -3.67% $15 025 615 032 SHIB 7 days price change
14 Polygon (MATIC) MATIC Polygon predictions 69.2% 59 $2.02 -8.18% -12.60% $14 789 690 265 MATIC 7 days price change
15 Binance USD (BUSD) BUSD Binance USD predictions 96% 1 $0.999731 -0.10% -0.13% $14 211 573 940 BUSD 7 days price change

Be the first to receive Cryptocurrency Price Predictions and Forecasts daily

Get cryptocurrency price predictions, forecasts with analysis and news right to your inbox.

© 2015-2022 Crypto-Rating.com

The usage of this website constitutes acceptance of the following legal information. Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website, including information about the cryptocurrencies and bitcoin is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Crypto Rating shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about cryptocurrencies. The entire responsibility for the contents rests with the authors. Reprint of the materials is available only with the permission of the editorial staff.