The difference between a call option (Call) and a put option (Put) is the first thing to understand in options trading. Both are contracts that give you a right (not an obligation), but in opposite directions. This guide explains each one with a worked example, including the breakeven point and the maximum gain and loss.
Call Option
A call option gives you the right to buy 100 shares at the strike price before the expiration date. You buy it when you expect the stock to rise. Your maximum loss is only the premium you paid, while your potential profit is open-ended as the stock climbs.
- Breakeven: strike price + the premium paid.
- Maximum loss: the premium only (limited).
- Maximum profit: theoretically unlimited.
Example: You buy a AAPL Call with a strike of 190 and a premium of $3. Your cost is $300 (3 × 100). You start to profit above $193.
Put Option
A put option gives you the right to sell 100 shares at the strike price before expiration. You buy it when you expect the stock to fall, or to protect your portfolio against a decline (hedging). Your maximum loss is the premium only.
- Breakeven: strike price − the premium.
- Maximum loss: the premium.
- Maximum profit: grows as the stock falls toward zero.
Example: You buy a TSLA Put with a strike of 250 and a premium of $4. You profit if the stock falls below $246.
The most common beginner mistake
Buying short-dated contracts far from the market price (OTM) because they look cheap. These contracts lose value fast to Theta and often expire worthless. Start with contracts near the money (ATM) and a sensible time frame of at least a few weeks.
