A call gives you the right to buy a stock at a set price before a set date. A put gives you the right to sell at a set price before a set date. You buy a call if you expect the price to rise, and a put if you expect it to fall. Either way, the most you can lose as a buyer is what you paid.
Four words, first
Most explanations of this define a call using three terms they have not defined. Here they are.
A call, concretely
A stock trades at $100. You buy a call with a $105 strike expiring in a month, for a $2.00 premium — $200 for the contract.
- The stock goes to $115. Your right to buy at $105 is worth about $10 per share. You paid $2. You are up roughly $800.
- The stock goes to $106. You were right about direction and still lost, because $1 of value cost you $2 to acquire.
- The stock stays at $100. The contract expires worthless. You lose the $200 and nothing more.
Note the middle one. Your break-even is not the strike — it is the strike plus the premium, $107 here. The stock has to clear $105 and pay you back for the contract before you make a penny. This is the single most common beginner surprise.
A put, concretely
Same stock at $100. You buy a put with a $95 strike for a $2.00 premium.
- The stock falls to $85. Your right to sell at $95 is worth about $10 per share. You are up roughly $800.
- The stock rises. The put expires worthless and you lose the $200.
Break-even runs the other way: strike minus premium, so $93. And people buy puts for two quite different reasons — to bet on a fall, or to insure shares they already own against one. The second is the older use, and the reason the instrument exists.
Side by side
| Call | Put | |
|---|---|---|
| Gives you the right to | Buy at the strike | Sell at the strike |
| You buy it when you expect | The price to rise | The price to fall |
| In the money when | Stock is above the strike | Stock is below the strike |
| Break-even | Strike + premium | Strike − premium |
| Maximum loss (as buyer) | The premium | The premium |
| Maximum gain (as buyer) | Unbounded in theory | Strike − premium, at zero |
What beginners get wrong
Thinking the strike is break-even
It is not. You have to clear the premium as well. A call that finishes a little in the money still loses money.
Buying the cheapest contract on the board
It is cheap because the market thinks it will not happen. Far out-of-the-money weekly contracts are cheap for exactly the reason they usually expire worthless.
Forgetting that time is charging rent
An option loses value every day it does nothing, and faster as expiry approaches. A stock will wait for you to be right. An option will not.
Assuming good news means a profit
The expected news is already in the premium. Earnings that merely meet expectations routinely produce a loss for call buyers as implied volatility collapses afterwards.
The cheapest way to check you have understood
Place the trade in a simulator and hold it to expiry. Reading that time decay is real takes thirty seconds; watching a contract you were right about expire worthless takes a month and you will never forget it. It costs nothing in a paper trading account.
Common questions
What is the difference between a call and a put?
A call is the right to buy at a set price; a put is the right to sell at a set price. You buy a call when you think the price will rise and a put when you think it will fall. Both are rights rather than obligations, and both cost a premium you lose if you are wrong.
Is buying a put the same as short selling?
They both profit when the price falls, but the risk is completely different. A put costs a premium and that premium is the most you can lose. Short selling has no ceiling on the loss, because there is no ceiling on the price. That difference is the main reason retail traders use puts.
What happens if my option expires worthless?
You lose the premium you paid and nothing else. The contract simply ceases to exist. For a buyer, the premium is always the maximum loss, which is what makes buying options a defined-risk position.
Can I lose more than I paid for an option?
Not as a buyer. Buying a call or a put caps your loss at the premium. Selling options is a different matter — a sold call can lose far more than the premium received, which is why it is not a beginner position.
What does in the money mean?
A call is in the money when the stock is above the strike; a put is in the money when the stock is below it. In the money means the contract has intrinsic value if exercised now — it does not mean the trade is profitable, because you still paid a premium to get there.
Do I have to exercise the option?
Almost nobody does. In practice you sell the contract itself before expiry and take the difference in premium. Exercising is possible but usually needlessly ties up capital.
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Stock Picks is an educational trading simulator published by Realtime Software Inc.. Nothing on this page is investment advice, a recommendation, or an offer to buy or sell any security. Trades placed in the app are simulated against live market prices — no securities change hands and no real money is at risk in the app. Simulated results predict nothing about real markets. Options involve risk and are not suitable for every investor. See our disclosures.