Put vs Call Options: Key Differences You Should Know

Options are financial derivatives that enable investors to buy or sell an underlying asset at an exercised price, within a specified period. Call options and put options are the two major types of options used for quite different purposes in trading and investment strategies.

Call Options

A call option gives the holder the right to purchase on or before the expiration date of the option the underlying asset at the stipulated strike price. 

If an investor expects the price of an asset to rise, he may purchase a call option, which grants him the right to buy an asset at a price below the expected future market price. 

This gives way to potential unlimited profit if the asset ribbon ascends too high and restricts the maximum loss to the amount paid for the option premium.

Put Options

On the other hand, a put stock option trading gives the holder the right to sell the underlying asset at a predetermined strike price within a given period. 

Investors buy put options when they foresee a drop in the asset price allowing them to sell the asset above its anticipated market value. 

One stands to earn a windfall profit if the asset price drops dramatically but profits are restricted since it cannot drop below zero. The maximum loss is limited to the premium paid for the option. 

Call vs. Put: A Comparison

Objective:

• Call Options: Created to provide a benefit following a rise in the asset's price

• Put Options: Created to profit from an expected decline in the asset's price.

Conferred Rights:

• Call Options: Right to the asset at the strike price.

• Put Options: Right to sell the asset at the strike price.

Profit Potential:

• Call Options: Unlimited profit lost by the underlying asset priced infinitely high

• Put Options: Limited profit potential, dependent on the asset price going to zero.

Risk exposure:

• Call Options: The max. Loss cannot go further than equity premiums paid.

• Put Options: Similarly as above; losses cannot exceed premiums paid. 

Strategic Applications

Hedging:

Call Options

Investors may write call options for the purpose of generating income, particularly if they believe that the price of the asset will remain unchanged or decline slightly.

Put Options

One may buy put options which act as insurance against any loss in the value of the assets in their portfolios.

Speculation:

Call Options

Traders are owners of calls purely on a conventional basis to speculate upon upward price movements without making a direct commitment to the ownership of the underlying asset.

Put Options

An owner of puts is a trader who speculates upon declines in price, perhaps profiting from declines without selling the asset short.

Conclusion

An investor and trader contemplating options in their tactics must know the distinctions between call-and-put options. 

The calls are favored in bull scenarios, allowing the owner the right to purchase the asset at favorable prices when the market increases; and the puts are favored in bear cases: the owner has the right to sell the asset at favorable prices when the market declines. 

Each option offers its opportunities and risks, so market outlook, risk tolerance, and investment objectives should be fully assessed before entering an options order.