Options Education Series: Calls and Puts

First off, lets ask the question, “What exactly is an option?” An option is a contract to buy or sell a specific financial security, aka the option's underlying instrument, underlying interest, or simply “underlying”. For equity options, the underlying can be a stock, exchange-traded fund (ETF), exchanged-traded note (ETN), etc. The contract establishes a specific price, aka the strike price, at which the options contract may be exercised, or acted upon. An option also has an expiration date, where it expires, no longer has any value, and no longer exists. What's a “Call?” A call option is derivative contract between a buyer and a seller. It provides the purchaser with the right to purchase a specific underlying at a certain price within a certain time period. With a call option, as with all options, the buyer has the right, though not the obligation to buy the asset, if the underlying trades at or above the strike price. The seller (known as the call writer), on the other hand, is obligated to sell the asset if the underlying trades above the strike price. What's a “Put?” A put option is derivative contract between a buyer and a seller as well. It provides the purchaser with the right to sell a specific underlying at a certain price within a certain time period. With a put option, as with all options, the buyer has the right, though not the obligation to sell the asset, if the underlying trades at or above the strike price. The seller (known as the put writer), on the other hand, is obligated to purchase the asset if the underlying trades below the strike price. *Portions of this series have been adapted from free educational materials distributed by The Options Industry Council and The Chicago Board Options Exchange.