What You’ll Learn
- What a Call and a Put mean in simple terms.
- Why a Call gives a right to buy and a Put gives a right to sell.
- How the strike price, premium and expiration date work together in a simple example.
- Common misunderstandings beginners have about options.
Key Takeaways
- A bought Call gives you the right to buy the underlying asset at a set price.
- A bought Put gives you the right to sell the underlying asset at a set price.
- That is why a Call is often linked to rising prices and a Put to falling prices.
- The move must happen in time and be large enough to cover the premium before it can mean a profit for the buyer.
Imagine this
Imagine you walk past an ice cream stand today. Your favourite ice cream costs two euros. You think, “It might cost more tomorrow.” The seller says, “If you want, you can still buy it tomorrow for two euros. Give me ten cents today for that promise.”
You do not have to buy anything tomorrow. If the ice cream costs three euros, you can still buy it for two. If it costs only one euro, you can simply buy it for one euro instead. In this simple example, you do not get the ten cents for the promise back.
So the promise gives you a right to buy. In the world of options, that right to buy is called a Call.
Now imagine you have a toy that is worth five euros today. Someone promises, “Tomorrow, you may sell it to me for five euros.” You do not have to sell it. But if the toy is worth only three euros on the market tomorrow, you can use your agreed selling price.
That promise gives you a right to sell. In the world of options, that right to sell is called a Put.
In trading, these promises are called options. A Call and a Put are two different types. An option is a contract with specific rules, such as an agreed price and a final date when it is valid.
What is a Call?
A Call gives its buyer the right to buy something later at a price set in advance. That something could be a share, for example. The agreed price is called the strike price. It may sound technical, but it simply means the price written into the contract.
When you buy a Call, you often expect the underlying asset’s price to rise. The underlying asset is what the option is based on. If its market price rises above your strike price, your right to buy may become useful: you can buy at the agreed price even though the market price is now higher.
A Call does not force you to buy. You may use your right, but you do not have to. When you buy an option, you pay a price for that right. This price is called the premium. It is like the ten cents for the ice cream promise: you pay it even if you do not use the right later.
A Call gives its buyer the right to buy later at the agreed price.
What is a Put?
A Put gives its buyer the right to sell something later at a price set in advance. When you buy a Put, you often expect the price to fall. Your Put gives you an agreed selling price. If the market price drops below it, that right may become useful.
A Put does not force you to sell either. If the market price is higher than your agreed selling price, you can leave the Put unused and sell at the higher market price instead.
You also pay a premium when you buy a Put. If the Put is not useful to you in the end, you normally do not get that premium back. A Put can also be used for protection: someone who owns a share can use one to soften part of a possible price drop. That protection has a cost — the premium — and does not automatically prevent every loss.
A Put can protect an agreed selling price when the market price falls.
Call and Put: What’s the difference?
The main difference is what the right lets you do:
- Call: you may buy later at the agreed price.
- Put: you may sell later at the agreed price.
This leads to the usual expectation about direction. When you buy a Call, you often hope the price will rise. If the underlying asset becomes more expensive on the market than your agreed buying price, the right to buy may become valuable. When you buy a Put, you often hope the price will fall — or you want to protect something you already own. If the underlying asset becomes cheaper than your agreed selling price, the right to sell may become valuable.
A Call and a Put do not change the market price. They set out what you are allowed to do under the contract and at what price. A Call helps you buy at a fixed price; a Put helps you sell at a fixed price. That is why a Call is often linked to an expectation of rising prices and a Put to an expectation of falling prices.
Call is the right to buy; Put is the right to sell.
For a closer comparison of both rights, read our Put vs Call Options guide.
What does a Call example look like?
Imagine a share that currently costs 50 euros. You buy a Call with a strike price of 50 euros and pay a premium of 2 euros. We will look at the day the option expires. To keep the example simple, we will treat the option as if it covered exactly one share. Real contracts can cover a different number of shares.
The share price rises
At the end, the share costs 60 euros. With your Call, you may still buy it for 50 euros. That makes the right to buy worth 10 euros per share: it costs 60 euros on the market, while your agreed price is 50 euros.
But you paid 2 euros for the Call. In this very simplified example, 8 euros per share remain after subtracting the premium, before fees. The example deliberately leaves out other influences and possible contract details.
The share price does not rise enough
If the share costs 48 euros at the end, for example, it would be cheaper to buy it directly on the market for 48 euros than to use the Call and pay 50 euros. You leave the Call unused. You do not get the 2-euro premium back.
The example shows that a price rising at all is not always enough. The strike price, what you paid for the option and when it expires all matter.
What does a Put example look like?
Let’s use a share that costs 50 euros again. This time, you buy a Put with a strike price of 50 euros and pay a premium of 2 euros. To keep things simple, we will again look at a contract covering one share.
The share price falls
At the end, the share costs 40 euros. With your Put, you may still sell it for 50 euros. That makes the right worth 10 euros per share: you can sell for 50 euros even though the market price is only 40 euros.
After subtracting the 2-euro premium, 8 euros per share remain in this simplified example, before fees. The actual result can be affected by the contract size and its terms.
The share price does not rise enough
If the share costs 52 euros at the end, it would be better to sell it on the market for 52 euros rather than use the Put and receive only 50 euros. You leave the Put unused. The buyer loses the 2-euro premium.
So a Put can fit an expectation of falling prices. It can also protect a share you already own. In both cases, the right costs a premium.
Price direction, time remaining and the premium you paid all affect whether an option becomes useful.
Why is a Call linked to rising prices and a Put to falling prices?
A Call gives you the right to buy at a set price. If the market price rises, your agreed buying price may become cheaper by comparison. That is why buying a Call is often linked to an expectation of rising prices.
A Put gives you the right to sell at a set price. If the market price falls, your agreed selling price may remain high by comparison. That is why buying a Put is often linked to an expectation of falling prices or a wish to protect something you own.
The word “often” matters: a Call does not automatically make money whenever the price rises. A Put does not automatically make money whenever the price falls. The move must suit the specific option. The premium, time remaining and other influences on the option price also matter.
A simple way to remember the difference
Think again about the ice cream stand and the toy:
Call
A Call gives you the choice to buy later at an agreed price.
Put
A Put gives you the choice to sell later at an agreed price.
To remember the usual direction too: a Call often fits an expectation of rising prices. A Put often fits an expectation of falling prices or protecting something you already own. The short reminder is: Call = right to buy. Put = right to sell.
Common beginner misunderstandings
“A Call is a share.”
No. A Call is a contract that gives you a right. It is not the same as owning the share. Depending on the option and its terms, exercising it may lead to a purchase; the Call itself is the right to do so.
“A Put is always just a bet that prices will fall.”
Not necessarily. A Put can also protect a share someone already owns. The aim may be to soften part of a possible drop. This protection costs the premium and does not remove every risk.
“If the price moves in my direction, I am sure to make a profit.”
Not automatically. The price must move far enough and in time. What you paid for the option also matters. The option’s price can change with time remaining and other factors too.
“A Call or Put forces me to buy or sell.”
When you buy an option, you buy a right, not an obligation. Someone who sells an option takes on obligations under the contract. This article focuses mainly on the buyer; selling involves different risks.
“I get the premium back if I do not use the right.”
No. The premium is the price you paid for the right. It is normally not refunded if you do not use it.
The most important rule
Before you think about price direction with a Call or Put, ask yourself this first:
With a Call, the answer is: you may buy at the agreed price. With a Put, the answer is: you may sell at the agreed price.
Then ask a few more questions: How much is the premium? When does the option expire? And how would the price need to move for the right to be useful? To get started, it is enough to understand the basic idea. Options can become more complex when you sell them, combine them or use them with different underlying assets. That is why these examples deliberately show only one bought Call and one bought Put.
Glossary
- Option
- A contract that gives the buyer a specific right. When you buy it, you generally do not have to use that right.
- Call
- An option that gives the buyer the right to buy the underlying asset at the strike price.
- Put
- An option that gives the buyer the right to sell the underlying asset at the strike price.
- Underlying asset
- The asset an option is based on, such as a share.
- Strike price
- The buying or selling price set in the option contract.
- Premium
- The price a buyer pays for an option.
- Expiration date
- The final date an option is valid. The exact terms depend on the contract.
Learn Call and Put step by step
Now you know the main difference: a Call gives you the right to buy, while a Put gives you the right to sell. In the BeInOptions Academy, you can revisit the basics of an option and its main parts at your own pace.
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