# 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.