Calls and puts: what are you actually buying?

Read the contract before the price

A share can stay in your account for years. An option has a deadline. It is a contract linked to an underlying security, such as a stock or an exchange-traded fund (ETF). This lesson covers standard exchange-listed options, starting with the buyer’s side.

Four details belong together: the underlying, whether it is a call or put, the strike price, and expiration. The strike is the price at which the contract lets its holder buy or sell the security. The premium is the separate price paid for that right.

The Options Industry Council’s introduction explains the contract terms. A standard US stock-option contract usually covers 100 shares, but adjusted contracts and other products can differ. Check the multiplier and what must be delivered instead of assuming every option means 100 shares.

In an options chain, many contracts share one company name. Match the strike, call or put, expiration and multiplier every time. A cheap-looking price for a different deadline is a different contract, not a discount on the one you meant.

A call buys one right; a put buys another

Imagine a made-up stock called Maple at $50. All examples below use US dollars, one unadjusted 100-share US stock-option contract, and no fees.

• Buy a $50 call: you obtain the right to buy 100 Maple shares for $50 each under the contract’s exercise rules.
• Buy a $50 put: you obtain the right to sell 100 Maple shares for $50 each under those rules.

If Maple rises to $60, buying at $50 becomes useful. If it falls to $40, selling at $50 becomes useful. Those are two different rights, rather than two buttons for predicting the next candle.

A bought put can also accompany shares you already own. It can limit part of a holding’s downside over a specified period, at the cost of its premium. The shareholding and the option still need to be assessed together.

The premium does not pay for the shares

Suppose the call is quoted at $2 per share. You pay $2 × 100 = $200 for one contract. You have bought an option, not 100 shares for $200.

If you later exercise the $50 call, purchasing the shares requires $50 × 100 = $5,000, separately from the $200 premium already paid. Your broker needs the necessary cash or permitted buying power. Once you own the shares, their price can keep falling.

You may instead sell the option to close the position while it still trades, if a buyer and an acceptable price are available. Selling an option you own to close it is different from selling a new option to open an obligation.

Who has the obligation?

The option’s writer receives premium in exchange for an obligation. If assigned on a call, the writer must deliver the shares at the strike. If assigned on a put, the writer must buy the shares at the strike. Owning a right and promising to fulfil someone else’s right have different risks.

For a purchased call or put considered alone, the option loss is limited to the premium plus costs. That does not describe an uncovered call writer, whose potential loss is unlimited. The SEC’s listed-options bulletin sets out this distinction. Learn the full comparison in options risk.

Can I buy listed options where I live?

US brokers require specific options approval, as FINRA explains. In Canada, the Montréal Exchange lists equity options; ask your dealer about approval, account restrictions and the particular market you can access.

UK and Australian access also depends on the firm, account and product. These lessons are educational, including for readers too young to open a trading account.

Next, see how a premium changes profit and loss, then what happens at expiration. Return to the options learning path, or build the foundation in stocks and investing.