What Are Call Options
From the two sides you get to pick – calls or puts, here we discuss the first one.
A call option, just like the put option, can be bought or sold.
When you buy a call, you pay a fee called a premium to enter the trade.
When you sell a call, you receive that fee when you enter a trade.
Let’s get into details.
How do you earn money on call options?
There are 2 ways to earn with call options.
1) If you’re buying calls:
a)
You earn money by “selling your profitable trade” to someone else, but this has to happen before the time of your trade expires.
– This is basically like exiting a trade sooner.
b)
If you stay in the trade, that’s the only time you have to actually buy the stock.
– Usually this is extremely good if you can afford to buy the stock (or want to buy it) but most people don’t.
2) If you’re selling calls:
Requirement:
To sell a call you need to already own the stock you want to sell a call on.
How you earn on the trade:
You get paid for accepting to sell the stock you already bought at a certain price that you choose.
Possible trade outcomes:
Trade outcomes depends on where the stock price is at the last day of your option trade.
1) If the stock you own is below the price you said it will be (at the time of the last day of your option trade) – you keep:
– the premium you already got paid
– the stock you already own
2) If the stock price is above the price you said it will be (at the time of the last day of your option trade):
You’re selling the stock at the price you picked (strike price) and you miss the remaining upside.
If that’s what you wanted, congratulations – you got rid of that stock.
If that’s not what you wanted, you can roll that trade – more on that here.
Main Features of Call Options
| Feature | Description |
| Strike Price | The price you can buy the stock at |
| Expiration Date | When the option expires |
| Premium | The cost to buy the option |
| Underlying Asset | The stock the option is based on |
When do you start profiting on calls?
If you buy calls – you make money when the stock price goes above your break-even point.
That break-even is the strike price plus the premium you paid.
These calls are appealing when you think a stock will go up.
If the price jumps past your strike price, your option becomes valuable.
In that case, you can buy the stock, or just sell your option for a profit.
Honestly, most people just sell the contract instead of buying all those shares.
If the stock price stays below your strike price, the option just expires.
This means that you lose the premium you paid at the start.
If you sell calls – you make money once you enter a trade.
As soon as you place it, the money goes straight to your account.
These calls are appealing when you think the stock won’t go to the price you picked or when you aim to get rid of the stock at a certain price and earn along the way too.
Most people use the first logic.
If the stock price goes above your price – you get assigned and will sell the stock at that higher price (that’s good or bad depending on how you choose to use this strategy and in which scenario)
Simply put, if you want to keep the stock and keep earning “passive income” on it, your goal is not to get assigned.
If your goal is to get rid of the stock or profit from stock rising up + collecting premium, that’s good.
What Are Put Options
A put option, just like the call option, can be bought or sold.
When you buy a put, you pay a fee called a premium to enter the trade.
When you sell a put, you receive that fee when you enter a trade.
How do you earn money on put options?
When you buy a put option – you think the price will drop.
This is useful when:
a) you want to earn money while the stock is falling
b) you own the stock, think it may fall and by that cover some losses in that period
When you sell a put option – you think:
a) the price will fall and I want to buy the stock cheaper + get paid for wanting to buy it lower
b) stock won’t fall that much and I’ll earn “free money”
Here’s how puts work if you want to speculate on the stock falling down and earn extra money or just to protect your position:
- Pick a strike price (where you want to sell at)
- Pick an expiration date
- Pay a premium for the put
Example: You own XYZ stock at $50. You buy a $45 put for $2. If XYZ drops to $40, you can still sell at $45. That’s how buying a put “protects” your position.
If you just want to speculate on the stock dropping, that’s also how you can use a put and earn money from the stock falling and the process is the same.
People buy puts for two main reasons:
- Protection: Guard your stocks from falling prices (buying puts)
- Speculation: Try to profit if you think a stock will drop (buying puts)
On the other hand, people sell puts for two main reasons:
- To get a stock you want for less: Buy the stock at the lower price and count on the long term growth
- Profit on fear of stock falling: You’re willing to buy the stock if it falls tremendously but still positioning yourself at the price where that’s very unlikely to happen
If the stock stays above your strike price – you receive “free money.”
If the stock falls below the strike price – you buy a stock you wanted for less and also get paid in the process.
When do you start profiting with puts?
If you’re buying puts your loss is limited to the premium you paid.
If the stock stays above your strike price (it doesn’t fall as much), the put expires and you lose just that premium.
You don’t need to own the stock to buy a put.
Plenty of traders buy puts on stocks they don’t own, hoping to cash in if prices fall.
Buying puts get more valuable as the stock price drops below your strike price.
The exact price at which you start earning is breakeven price (how much you paid for the trade + stock price).
If you’re selling puts, you get paid immediately no matter what happens.
The money goes straight into your account and stays there no matter what.
If the price stays above the strike price you picked, you keep the premium you got paid – “free money, great”.
If the price goes below the strike price you picked, you get to buy that stock at that strike price.
This is good if you wanted this, but it’s bad if you no longer want it or have no money for it.
Don’t worry, if you go from “I would like to buy this stock at this price” to “I no longer want to buy this stock” you can avoid this by rolling the option.
It basically means changing up your trade and giving yourself more chance to avoid it.
How Call Options Work
Main Parts of Call Options
Depending on if you a) buy calls or b) sell calls:
a) Buy calls
Strike Price: Price at which you’re willing to buy the stock after it rises
Expiration: When your rights end (time in trade)
Premium: What you pay for a trade
b) Sell calls
Strike Price: Price at which you’re willing to sell the stock after it rises
Expiration: When your rights end (time in trade)
Premium: What you get paid to enter a trade
Your Choices as a Buyer
As a call buyer, you’ve got three options:
- Exercise: Buy the stock at your strike price (this is good)
- Sell: Trade your option to someone else (this is good)
- Let it expire: Do nothing if it’s not worth it (basically a lost trade)
Honestly, most folks just sell their options. It’s easier and you don’t need a ton of cash to buy all those shares.
Your max loss is always the premium you paid.
That’s one reason some people see calls as less risky than other bets.
Your Choices as a Seller
As a call seller, you’ve got three options:
- Get rid of the stock: Sell the stock at your strike price if stock reached that price (this could be good)
- Roll: Close the current trade and make a new one that fits the current scenario better (depends)
- Let it expire: Do nothing and hold (this is good)
Most folks just hold. They do this because they count on the stock not reaching their level.
For others, who want to get out of the stock position – they aim for the stock to reach their level.
How Put Options Work
Depending on if you a) buy puts or b) sell puts:
a) Buy puts
Strike Price: Price at which you’re willing to sell the stock after it falls
Expiration: When your rights end (time in trade)
Premium: What you pay for a trade
b) Sell puts
Strike Price: Price at which you’re willing to buy the stock after it falls
Expiration: When your rights end (time in trade)
Premium: What you get paid to enter a trade
Your Choices as a Buyer
- Exercise – Sell shares at the strike price
- Sell the option – Trade it for a profit
- Let it expire – Walk away if it’s not worth anything
If you buy a put of ABC stock at $40 strike price and the stock falls to $30 – you are with this trade selling the stock that is worth $30 for $40, therefore making a profit of $10.
Time eats away the buy put value.
The closer you get to expiration, the less time there is for the stock to move your way.
Most people sell their puts for a profit instead of exercising. It’s just simpler, and you keep any leftover time value.
Your total risk is the premium you spent.
No matter what, you can’t lose more than that.
Your Choices as a Seller
As a put seller, you’ve got three options:
- Get assigned: Buy the stock at your strike price if stock reached that price (this could be good if you wanted that)
- Roll: If you no longer want the stock, close the current trade and make a new one that fits the current scenario better (most often bad)
- Let it expire: Do nothing (this is good)
Most folks just hold. They do this because they count on the stock not reaching their level.
For others, who want to get assigned and want to buy the stock once it falls – they aim for the stock to reach their level.
How You Make Money With Calls and Puts
You can make money with options by buying or selling calls and puts. Your profit depends on which side you’re on.
Buy calls, and you win if the stock shoots past the strike price. You pay a premium, and that’s your max loss. The upside? It’s unlimited—stocks can keep climbing.
Buy puts, and you profit if the stock drops below the strike price. This move is for when you expect a stock to fall.
Sell calls, and you get paid a premium right away. If the stock stays below the strike, you keep the cash. But if it jumps, you miss the additional upside.
Sell puts, and you also collect a premium. You win if the stock stays above the strike price.
| Strategy | How You Profit | Maximum Profit | Maximum Loss |
| Buy Calls | Stock rises above strike | Unlimited | Premium paid |
| Buy Puts | Stock falls below strike | Limited | Premium paid |
| Sell Calls | Stock stays below strike | Premium received | Unlimited |
| Sell Puts | Stock stays above strike | Premium received | Limited |
You can pick your strategy based on how much risk you can handle.
Buying options limits your loss, but you need the stock to move a lot and have the right timing.
Selling options brings in steady income, but you could face big losses if things go wrong.
Your account value jumps around with the stock and as time ticks by. It’s not always predictable.
Risks of Calls and Puts
Options can be risky. You should know what you’re getting into before you start trading them.
Risk levels depend on your strategy:
| Strategy Type | Maximum Loss | Risk Level | Chance of winning |
| Long Call/Put | Premium paid | Low | Lower |
| Covered Call/Put | Opportunity cost + premium | Medium | Higher |
| Naked Call | Unlimited | High | Low |
| Naked Put | Strike price – premium | High | Low |
If you buy calls or puts, you could lose the entire premium. That’s what happens if the option expires worthless.
Leverage makes everything bigger—gains and losses.
With a small investment, you control a lot of stock. That can backfire fast.
Volatility can shake up your portfolio in ways you didn’t expect.
Sometimes a winning trade turns south in a flash.
Selling naked calls is risky. If the stock soars, you’re on the hook for huge losses.
Time decay hurts buyers.
Options lose value as expiration gets closer, even if the stock price doesn’t move.
Naked puts can be dangerous too.
You might have to buy shares at a much higher price than they’re worth.
Liquidity can be a problem.
If you want out and there aren’t enough buyers, you’re stuck.
Make sure your overall investing plan considers these risks.
Options can boost your returns, but they can also make losses sting a lot more.
Ways to Use Calls
Call options open up several ways to trade or invest.
You can pick a strategy that fits your goals and how much risk you’re okay with.
Buying Calls Instead of Stocks
Buying calls can take the place of buying shares outright.
It costs a lot less up front, but you still get to benefit if the stock price goes up.
Say a stock trades at $100 per share. You might only need $10 for a call option, so you get similar upside with much less money on the line.
Selling Covered Calls for Extra Income
If you already own shares, you can sell call options on them.
This brings in some extra cash from the premiums you collect.
If the stock stays under the strike price, you keep both your shares and the premium.
But if the stock jumps above the strike, you might need to sell your shares.
Main Call Strategies
| Strategy | Best When | Risk Level |
| Buying Calls | You expect stock prices to rise | Limited to premium paid |
| Covered Calls | You own stock and want income | Low to moderate |
| Call Spreads | You want to limit risk and reward | Moderate |
Managing Risk
Keep in mind, call options have expiration dates. If the option expires out of the money, you lose what you paid.
One contract covers 100 shares. Always multiply the price you see by 100 to know your real cost.
Ways to Use Puts
Puts let you sell a stock at a set price. You pay a premium for this right. There are a few ways to use puts when trading.
Buying Puts for Protection
Puts can protect stocks you already own. It’s like buying insurance—if your stock drops, your put gains value.
This helps you hedge against losses. Folks often use puts if they’re worried about the market but don’t want to sell out.
Buying Puts to Bet on Drops
If you think a stock will fall, you can buy puts. If the price sinks below the strike, you profit. Your biggest risk is just the premium you paid.
Selling Puts for Income
Selling puts means you collect a premium right away. You’re agreeing to buy the stock if it drops to the strike price. This can be a good move if you want to own the stock at a lower price anyway.
Main Put Strategies:
- Protective Put: Buy puts to protect stocks you own
- Long Put: Buy puts to profit if prices fall
- Cash-Secured Put: Sell puts with cash ready to buy the shares
- Put Spread: Buy and sell different puts to limit risk and cost
Each approach suits different market opinions and risk levels. Go with what matches your comfort zone and goals.
Picking Calls or Puts in the Current Market
Deciding between calls and puts really depends on your view of the market. You want your option type to line up with what you think will happen.
Pick calls if:
- You think stocks are headed up (buy call)
- The market looks bullish (buy call)
- You want a shot at big gains (buy call)
- You want to exit the stock position and earn more (sell call)
- You want to earn on stock rising up + premium (sell call)
- You think the stock could fall a little and you want to hold the stock long term + mitigate some of the stock downfall movement (sell call)
Pick puts if:
- You expect stocks to drop (buy call)
- The market seems bearish (buy call)
- You’re betting on a downward move (buy call)
- You want to protect other stock position (sell a put)
- You want to buy stock for cheaper (sell a put)
- You don’t believe the stock will fall that much (sell a put)
