Calls and Puts Explained
What you'll learn in this module
- Explain what a call and a put give the buyer
- Identify which way the underlying must move to help a long call or a long put
- Calculate the break-even price at expiration for a long call and a long put
Lesson
There are only two types of options. Everything else is built from them.
A call gives the buyer the right to buy 100 shares at the strike price.
- Call buyers generally benefit when the stock goes up.
- Call sellers generally benefit when the stock stays flat or goes down.
A put gives the buyer the right to sell 100 shares at the strike price.
- Put buyers generally benefit when the stock goes down.
- Put sellers generally benefit when the stock stays flat or goes up.
A simple way to remember it: Call up, put down. You "call" the stock up to you. You "put" the stock onto someone else.
Long and short. If you buy an option, you are long it. If you sell an option you don't already own, you are short it. So there are four basic positions:
| Position | You... | Generally helped by |
|---|---|---|
| Long call | Bought the right to buy | Stock rising |
| Short call | Took on the obligation to sell | Stock flat or falling |
| Long put | Bought the right to sell | Stock falling |
| Short put | Took on the obligation to buy | Stock flat or rising |
Break-even at expiration. The stock has to move far enough to cover the premium you paid.
- Long call break-even = strike + premium
- Long put break-even = strike - premium
Above the call break-even at expiration, the long call shows a gain. Below the put break-even at expiration, the long put shows a gain. Between the strike and the break-even, the option has some value but not enough to cover what you paid.
Puts as protection. Someone who owns 100 shares can buy a put to set a floor under those shares. If the stock drops below the strike, the put gains value. This is often called a protective put. It costs premium, like an insurance payment.
Calls and puts are the building blocks. Spreads, like the credit spreads many traders study, are just combinations of calls or puts at different strikes. Learn these two well and the rest gets much easier.
Worked example
A long put and its break-even
Stock ABC trades at $40. You look at a $40 strike put that expires in 45 days. The premium is $1.50.
- Cost of one contract: $1.50 x 100 = $150.
- Break-even at expiration: $40 strike - $1.50 premium = $38.50.
- Scenario A, ABC is at $35 at expiration: the put lets you sell at $40 stock worth $35. Value = ($40 - $35) x 100 = $500. Net = $500 - $150 = $350 gain.
- Scenario B, ABC is at $39 at expiration: value = ($40 - $39) x 100 = $100. Net = $100 - $150 = $50 loss. The put had value, but not enough to reach break-even.
- Scenario C, ABC is at $42 at expiration: the put expires worthless. Net = $150 loss, the full premium.
The long put needed ABC below $38.50 at expiration to show a gain. Its maximum loss was the $150 premium.
thinkorswim desktop (Windows)
Find calls and puts in the option chain
Go to the Trade tab and select All Products. Type a symbol (for example SPY) in the symbol box. Below the stock quote, the Option Chain section lists expirations. Click an expiration to expand it. Calls are on the left, puts are on the right, and the strike prices run down the middle.
Key takeaways
- A call is the right to buy; a put is the right to sell.
- Long call: helped by the stock rising. Long put: helped by the stock falling.
- Long call break-even = strike + premium. Long put break-even = strike - premium.
- Every spread is built from calls and puts.
Module 2 quiz
5 questions for practice. No pass or fail. You can retake it.