Call option vs put option: what's the difference?

What is a call option and how does it work?

A call option gives the holder the right, but not the obligation, to buy an underlying asset at a specific price on or before a specific date in the future. The specific price is called the strike price, and the specific date is known as the expiration date. The amount you pay for the call option is called the premium, and the premium is the maximum amount you can lose. You would buy a call option strategy to speculate on a higher price in the underlying stock, perhaps ahead of an earnings announcement.

You can choose to sell the call option at any time before expiry to close the position. Or, you can hold the option to its expiry, when it will be settled for cash. If you sell the option for a higher price than you paid, you will make a profit. If the security falls below the exercise price, you would not choose to exercise the call option. You would let that right lapse.

At expiry, the breakeven level for a long call strategy is the cost of the premium paid, plus the strike price. If the stock price at expiry is above the breakeven level, the trade will have made a profit. If the stock price is below the strike price at expiry, you would lose all the premium paid.

Example of trading a call option

Imagine that you think a company will beat its earnings estimates, so you decide to buy a call option to take advantage of the anticipated increase in the share price. You could choose a call option with a strike price slightly above the current share price and an expiration date after the earnings announcement.

Your losses are limited to the total premium paid, marked in the graph above by the shaded area below the horizontal line. The breakeven level on the trade is the cost of the premium paid plus the strike price, marked on the graph where the dark blue line crosses the horizontal axis.

You can sell the option before the expiration date to take a profit or a loss to close the position, or you can choose to hold the call option until expiry. In theory, you can also choose to exercise the call option and take delivery of the underlying stock or security at any time. You would exercise your right if the share price is trading above the exercise price. With us, no exercising of options is possible. All options are cash-settled at expiry.

At expiry:

• If the share price closes below the strike price, the call option is out of the money and you lose the premium paid
• If the share price closes above the breakeven price, the call option strategy will make a profit. The higher the share price, the greater the profit
• If the share price closes between the strike price and the breakeven level, the option will have some value, but not enough to cover the total cost of the premium

What is a put option and how does it work?

A put option gives the holder the right, but not the obligation, to sell an asset at a strike price on or before an expiration date. Put options increase in value when the underlying asset falls in value. The cost to buy the put option is called the premium, and this figure is your maximum potential loss on the trade. Buying a put option can be a speculative position, or it can be used to hedge an existing long position if you think the underlying asset may fall in price in the short term.

You can choose to sell the put option at any time before expiry to close the position, or you can hold the put option until expiry when it will be settled for cash. If you sell the option at a higher price than you paid, you will make a profit. If the security moves above the exercise price, you would not choose to exercise the put option. You would let that right lapse.

At expiry, the breakeven level for a long put strategy is the cost of the premium, minus the strike price. If the stock price at expiry is below the breakeven level, the trade will have made a profit. If the stock price is above the strike price at expiry, you would lose the premium paid.

Example of trading a put option

Imagine that you think a company's share price will fall because they are going to miss their earnings estimates. You decide to buy a put option that will increase in value if your prediction is correct.

You would choose a put option with a strike price slightly below the current share price level and an expiration date after the earnings announcement. Your losses are limited to the total premium paid, marked on the graph below by the shaded area below the horizontal line. The breakeven level on the trade is the cost of premium paid minus the strike price, marked on the graph where the dark blue line crosses the horizontal axis.

You can sell the option before the expiration date to take a profit or a loss to close the position, or you can choose to hold the option until expiry. At expiry, all options are cash settled.

At expiry:

• If the share price is above the strike price, you will lose the premium paid because the put option is out of the money
• If the share price closes below the breakeven price, the trade will make a profit. The lower the share price at expiry, the greater the profit. The maximum profit would be if the underlying asset fell to zero
• If the share price closes between the strike price and the breakeven level, the option will have some value, but not enough to cover the total cost of the premium paid

Call option vs put option: key differences

Both call and put options give holders rights but not obligations. Call options increase in value when the underlying asset increases in price, while put options increase in value when the underlying asset decreases in price.

What are the benefits and risks of call and put options?

Call and put options are leveraged instruments that allow you to speculate on the movement of a market without ever owning the underlying asset. This means your profits can be magnified, as can your losses. The leverage allows you greater exposure to the underlying asset for less capital. You can choose your strike price and expiration date to control your risk exposure.

If you are long a call or put option, the maximum losses are always the premium paid. A risk for both call and put options is the time decay on holding a position. Each day that passes, the value of the time component decreases, lowering the value of the option. There is a risk that, at expiry, the options finish out of the money and you lose all the premium paid.

The highest risk of trading options is if you choose to sell them. If the underlying asset price moves against you, and the buyer exercises their rights, you are obliged to sell or buy those securities at the exercise price. This can be a long way from the actual share price, so you could suffer a large loss.

Learn how to manage your risk.

How to start trading call and put options in the UK

1. Learn more about option trading
2. Open an account with us or practise with a free demo account
3. Trade options via CFDs
4. Select a call or put option: you can trade options on shares, indices, forex and commodities
5. Choose your position size, exercise price and expiration date
6. Open the position and manage your risk

Trading options via CFDs

You can trade options using CFDs – short for 'contract for difference'. CFDs are leveraged products. This means you don't own the underlying asset, but you're betting on its price movement. Your currency exposure and initial margin will vary according to the contract of the asset chosen.

Buying options using CFDs limit losses to the initial margin paid. Your wins or losses will depend on the outcome of your prediction. CFDs are popular with traders because you can offset losses on CFDs against profits for capital gains tax purposes.* Therefore, traders often use CFDs to hedge their positions.

* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than Japan.

Remember, trading with CFDs comes with added risk attached to leverage. Your position will be opened at a fraction of the value of the total position size – meaning you can gain or lose money much faster than you might expect. When share dealing, you buy and own the shares, so you aren't exposed to this risk. However, this isn't available on our platform.

How to trade call and put options summed up

• Call options give the holders the right, but not the obligation, to buy an asset at a specific price by a specified date. Put options give the holders the right but not the obligation to sell an asset at a specific price by a specified date
• Call options increase in value when the underlying asset increases in price, and put options increase in value when the underlying asset declines in price
• Call and put options are leveraged instruments that allow you to speculate on the movement of a market without ever owning the underlying asset
• If you are long a call or put option, the maximum loss is always limited to the premium paid. This happens if, at expiry, the options are out of the money