What is the Difference Between Call and Put?
🆚 Go to Comparative Table 🆚The main difference between call and put options lies in the rights they grant to the buyer and the potential outcomes for the underlying asset. Here are the key differences:
- Call Option: A call option is a contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price (the strike price) within a specific time frame. Buyers of call options hope that the value of the underlying asset will rise, allowing them to buy the asset at a lower price than its market value. Sellers of call options, on the other hand, hope that the asset's price will drop or remain the same, so they don't have to sell the asset at the higher strike price.
- Put Option: A put option is a contract that gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price (the strike price) within a specific time frame. Buyers of put options hope that the value of the underlying asset will fall, allowing them to sell the asset at a higher price than its market value. Sellers of put options, on the other hand, hope that the asset's price will rise or remain the same, so they don't have to buy the asset at the lower strike price.
In summary, call options are used when an investor is bullish on the underlying asset and put options are used when an investor is bearish on the underlying asset. Both options allow investors to hedge against potential losses or gains in the underlying asset, depending on their outlook.
Comparative Table: Call vs Put
Here is a table comparing the differences between call and put options:
| Call Option | Put Option |
|---|---|
| Right to buy | Right to sell |
| Buyer profits when the stock price rises above the strike price | Buyer profits when the stock price falls below the strike price |
| Seller profits when the stock price stays the same or falls | Seller profits when the stock price stays the same or rises |
| Buyer pays a premium to the seller | Buyer pays a premium to the seller |
| Can be exercised when the stock price is above the strike price | Can be exercised when the stock price is below the strike price |
| Generates profits when the value of the underlying asset is rising | Generates profits when the value of the underlying asset is falling |
| Typically purchased when expecting the stock price to rise | Typically purchased when expecting the stock price to fall |
| Maximum loss is the premium paid for the option | Maximum loss is the premium paid for the option |
In summary, a call option gives the buyer the right to buy a stock at a specific price by an expiration date, and a put option gives the buyer the right to sell a stock at a specific price by an expiration date. The primary difference between call and put options lies in their profitability conditions: call options are profitable when the stock price rises above the strike price, while put options are profitable when the stock price falls below the strike price.