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Education 02: What are CALLS and PUTS?

Updated on April 2, 2015

CALL Options

A CALL Option gives the buyer the right to buy a stock at a set price (Strike Price) within a set time frame (until the Expiration).

Example: A CALL $42 MSFT APR $1.25. This is a contract that gives the buyer the right to buy MSFT at $42 per share (agreed upon Strike Price) by the 3rd Friday in April (Expiration Date).

In the above example, MSFT is trading at $42.80 and there are 28 days until expiration. So, why would someone sell the right to buy MSFT shares at $42.00 when MSFT is already trading at $42.80? Well, the $1.25 that it would cost the buyer is the option price, and that goes to the seller (or what is referred to as the Writer - as they are WRITING the contract). In this case, the writer is willing to sell a contract and collect the $1.25 up front. The writer is expecting that the price for MSFT will not go above $43.25 (The Strike Price of $42 plus the money collected of $1.25) between now and expiration. The writer is obligated to fulfill the contract if the buyer chooses, so anytime MSFT is above $42, the writer is obligated to sell those shares to the buyer at $42.00. If the price goes below $42, the buyer will not choose to exercise the option as the buyer can buy the shares for less than $42 in the open market.


In summary, the Buyer of a CALL option expects the stock price to go up, while the seller (writer) expects the price to go down.

PUT Options

A PUT Option gives the buyer the right to sell a stock at a set price (Strike Price) within a set time frame (until the Expiration).

Example: A PUT $42 MSFT APR $0.45. This is a contract that gives the buyer the right to sell MSFT at $42 per share (agreed upon Strike Price) by the 3rd Friday in April (Expiration Date).

In the above example, MSFT is trading at $42.80 and there are 28 days until expiration. So, why would someone sell the right to sell MSFT shares at $42.00 when MSFT is trading at $42.80? Well, the $0.45 that it would cost the buyer is the option price, and that goes to the seller (or what is referred to as the Writer - as they are WRITING the contract). In this case, the writer is willing to sell a contract and collect the $0.45 up front. The writer is expecting that the price for MSFT will not go below $41.55 (The Strike Price of $42 less the money collected of $0.45) between now and expiration. The writer is obligated to fulfill the contract if the buyer chooses, so anytime MSFT is below $42, the writer is obligated to buy those shares from the buyer at $42.00. If the price goes above $42, the buyer will not choose to exercise the option as the buyer can sell the shares for more than $42 in the open market.


In summary, the Buyer of a PUT option expects the stock price to go down, while the seller (writer) expects the price to go up.

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