Call Option vs. Put Option: Know the Difference
By Shumaila Saeed || Published on January 24, 2024
A Call Option gives the holder the right to buy an asset at a specified price, while a Put Option grants the right to sell it. Both are financial derivatives used for hedging or speculating in markets like stocks and commodities.
Key Differences
A Call Option gives the holder the right, but not the obligation, to buy an underlying asset at a predetermined price within a specific time frame. Conversely, a Put Option provides the holder the right to sell an underlying asset at a predetermined price within a specific period. Both options offer different strategies for investors depending on their market expectations.
Shumaila Saeed
Jan 24, 2024
In a Call Option, the buyer anticipates that the asset's price will rise above the strike price before expiration to make a profit. On the other hand, a Put Option is bought with the expectation that the asset's price will fall below the strike price, allowing the holder to sell at a higher price. These options reflect opposite market sentiments.
Shumaila Saeed
Jan 24, 2024
Call Options are typically utilized in bullish markets, where the expectation of price increase is high. In contrast, Put Options are more common in bearish markets, as they provide a hedge against declining prices. This distinction highlights their respective roles in different market conditions.
Shumaila Saeed
Jan 24, 2024
The value of a Call Option increases as the market price of the underlying asset rises above the strike price. In contrast, the value of a Put Option increases as the market price of the asset falls below the strike price. This inverse relationship with the underlying asset’s price movement is a fundamental characteristic of these options.
Shumaila Saeed
Jan 24, 2024
Call Option buyers have the potential for unlimited profit as prices rise, with risk limited to the premium paid. Put Option buyers, while also risking only the premium, have profit potential limited to the asset's price falling to zero. This delineates the risk-reward profile of each option type.
Shumaila Saeed
Jan 24, 2024
ADVERTISEMENT
Comparison Chart
Profit Scenario
Asset price rises above strike price
Asset price falls below strike price
Shumaila Saeed
Jan 24, 2024
Profit Potential
Unlimited as asset price increases
Limited to asset price dropping to zero
Shumaila Saeed
Jan 24, 2024
ADVERTISEMENT
Call Option and Put Option Definitions
Call Option
Hedging instrument against rising prices.
To hedge against inflation, he bought a Call Option in gold.
Shumaila Saeed
Jan 09, 2024
Put Option
Financial tool for bearish market positions.
Anticipating a market drop, she bought a Put Option in real estate stocks.
Shumaila Saeed
Jan 09, 2024
Call Option
A speculative tool in options trading.
She used a Call Option to speculate on currency market movements.
Shumaila Saeed
Jan 09, 2024
Put Option
Right to sell shares at a fixed price before expiration.
Using a Put Option, he sold his declining shares at a stable price.
Shumaila Saeed
Jan 09, 2024
Call Option
Financial instrument for bullish market strategies.
Using a Call Option, she bet on the tech stock increasing in value.
Shumaila Saeed
Jan 09, 2024
ADVERTISEMENT
Put Option
A method for profiting from falling asset prices.
She utilized a Put Option to profit from the declining oil prices.
Shumaila Saeed
Jan 09, 2024
Call Option
A contract granting the right to buy an asset at a set price.
He bought a Call Option expecting the stock's price to rise.
Shumaila Saeed
Jan 09, 2024
Put Option
Protective strategy against declining asset values.
To protect his portfolio, he used a Put Option in volatile tech stocks.
Shumaila Saeed
Jan 09, 2024
Call Option
Right to purchase shares at a predetermined price.
The Call Option enabled him to buy shares below market price when they surged.
Shumaila Saeed
Jan 09, 2024
Put Option
A contract allowing the sale of an asset at a specified price.
He purchased a Put Option to sell his stocks if the market declined.
Shumaila Saeed
Jan 09, 2024
Repeatedly Asked Queries
What is a Call Option?
It's a financial contract giving the right to buy an asset at a predetermined price.
Shumaila Saeed
Jan 24, 2024
What is the risk in buying a Put Option?
The risk is also limited to the option's premium.
Shumaila Saeed
Jan 24, 2024
How does the strike price affect a Call Option?
The option is valuable if the asset's price exceeds the strike price.
Shumaila Saeed
Jan 24, 2024
How does the strike price affect a Put Option?
It's valuable if the asset's price falls below the strike price.
Shumaila Saeed
Jan 24, 2024
Can you sell a Call Option before its expiration?
Yes, options can often be sold before expiration.
Shumaila Saeed
Jan 24, 2024
What is a Put Option?
A contract that gives the right to sell an asset at a specific price.
Shumaila Saeed
Jan 24, 2024
When would an investor buy a Call Option?
When they expect the price of the underlying asset to rise.
Shumaila Saeed
Jan 24, 2024
What is the risk in buying a Call Option?
The risk is limited to the premium paid for the option.
Shumaila Saeed
Jan 24, 2024
Why would an investor buy a Put Option?
To profit from or hedge against the expected decline in an asset's price.
Shumaila Saeed
Jan 24, 2024
Can Call Options be exercised at any time?
It depends on the type: American options can be, while European options can't until expiration.
Shumaila Saeed
Jan 24, 2024
What factors affect a Put Option's price?
Similar to calls: underlying price, time, and volatility.
Shumaila Saeed
Jan 24, 2024
What occurs when a Put Option expires in the money?
The holder can sell the asset at the strike price or settle for the profit.
Shumaila Saeed
Jan 24, 2024
Are Put Options only for bearish investors?
Primarily, but they're also used for hedging in diverse strategies.
Shumaila Saeed
Jan 24, 2024
Are Put Options always exercised at expiration?
Only if they're in the money; otherwise, they expire worthless.
Shumaila Saeed
Jan 24, 2024
What influences the price of a Call Option?
The underlying asset's price, time to expiration, and volatility.
Shumaila Saeed
Jan 24, 2024
Are Call Options suitable for all investors?
They're best for those comfortable with risk and speculative strategies.
Shumaila Saeed
Jan 24, 2024
What happens when a Call Option expires in the money?
The holder can buy the asset at the strike price or settle for the profit.
Shumaila Saeed
Jan 24, 2024
Is time decay a factor in Call Options?
Yes, the value decreases as expiration approaches, if other factors are constant.
Shumaila Saeed
Jan 24, 2024
Does time decay affect Put Options?
Similarly, their value decreases with time if other factors remain unchanged.
Shumaila Saeed
Jan 24, 2024
Can Put Options be used for hedging?
Yes, they're commonly used to hedge against price declines.
Shumaila Saeed
Jan 24, 2024
Share this page
Link for your blog / website
HTML
Link to share via messenger
About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
Hifza Nasir
Shumaila Saeed
