What this one covers
- A call gives the right to buy at the strike, a put gives the right to sell
- Buy the 200 call for 5 and an expiry at 220 leaves 20 of value, 15 after the premium
- Buy the 200 put for 5 and an expiry at 180 produces the same 15, mirrored
- Calls profit when the stock rises, puts profit when it falls
The same thing, in writing
Options work in both directions
If the stock looks like it is going up there is an option for that, and if it looks like it is going down there is an option for that too. The example uses Apple at $200 and stays on the buy side only. The options chain has calls on the left, strikes down the middle and puts on the right. A call gives the right to buy a specific asset at a specific price, and a put gives the right to sell a specific asset at a specific price.
The call side
Buy the 200 strike call for $5. If the stock expires at 220, the call is worth $20, because 220 minus the 200 strike is 20. Subtract the $5 paid for it and the profit is $15.
The put side
Buy the 200 strike put for $5 and the arithmetic is the same in reverse. If the stock expires at 180, the difference between 200 and 180 is 20, and after the $5 premium the profit is $15.
Summary
A call gives the right to buy, and it profits when the stock goes up. A put gives the right to sell, and it profits when the stock goes down.
Topics
- call option
- put option
- options basics
- payoff
- quick tip
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