Calls Puts Basics

Options: Calls and Puts — The Basics ## What Is an Option? An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying security at a specified price (the strike price) on or before a specified date (the expiration date). Options are derivatives — their value is derived from the price of an underlying asset, typically a stock. Think of options as insurance contracts or reservations. You pay a small premium upfront for a right that may or may not have value at expiration. The key word is "right" — the buyer has the choice; the seller (writer) has the obligation. > Real-world analogy for a call option: Imagine you want to buy a house currently worth $400,000, but you don't have the full down payment yet. You pay the seller $5,000 for the exclusive right to purchase the house at $400,000 anytime in the next 6 months. If the house rises to $450,000, you exercise your right — you get a $50,000 gain for a $5,000 investment. If it falls to $370,000, you let the option expire and lose only your $5,000. This is exactly how a call option works. --- ## Call Options A call option gives the buyer the right to BUY the underlying stock at the strike price before expiration. Call buyer (long call): - Pays the premium - Has the right to buy - Profits when the stock price rises above the strike price + premium paid - Maximum loss: the premium paid (limited) - Maximum gain: theoretically unlimited (stock can keep rising) - Outlook: bullish Call writer/seller (short call): - Receives (collects) the…