Put Option vs. Call Option: Key Differences

Options trading has become easily one of the most prominent trading ventures, with numerous popular trading platforms and many active traders looking to gain profits by speculating on the market movements through buying or selling put and call options, depending on the fact if they feel the market sentiment about the asset is bullish or bearish.

How Call Options Work

Call options grant you the right to buy an underlying asset (stocks, commodities, indices, futures, etc.) at a fixed price, also known as the strike price, before the contract expires.

Investors buy calls when they believe that the price of their chosen asset will experience a significant rise. 

For example, a large number of traders opts to speculate on stock price movements during the quarterly reports from the world’s largest publicly listed companies, like Apple, Nvidia or Amazon. 

There’s always a lot of rumors, allegedly leaked data and predictions around these reports, and traders then speculate which stocks will react after the earnings reports are published. 

If they believe a certain stock will see a significant rise, they opt to buy a call option, lock in its purchase price and profit from the price difference if the stock’s value actually rises.

Call options allow you to maximize exposure to upward price movements during bullish market periods, giving you leverage and a control over a larger position, without having to commit large amounts of capital, which is what makes them so appealing to many.

However, you risk that entire premium if the asset fails to reach the strike price, or doesn’t do so in a limited timeframe, as options do lose value as they approach expiration, which is something you’ll commonly see referred to as “time decay”.

How Put Options Work

The other side of the coin are put options, which are used both to gain profit from a decline in an asset’s price, as well as to hedge a portfolio against potential losses.

Naturally, puts are most valuable in periods of high market volatility and during bullish trends, where they serve as sort of an insurance policy against potential losses, while also providing avenues for profit.

For example, the more a price of a stock falls below the strike price, the more the put option increases in value, allowing you to sell it at the price you bought it and earning you profit.

Obviously, this carries about the same level of risk as a call option would, as put options are also affected by time decay, and can become worthless if the asset’s price remains above the strike price.

The main distinguishing point here is the fact that the price of a stock cannot go below $0, so put options have more limited potential for profit than the theoretically unlimited potential of call options.

Rewards and Risks of Put and Call Options

Should You Trade This Way?

As you can see, options trading comes with extremely high levels of risk, both for buyers and sellers. In fact, this type of trading can essentially become gambling if approached without proper risk management and actual understanding of the market.

Because of how complex and volatile options trading is, we’d only recommend it to those traders that can afford to lose, and even for them, we’d strongly advise them to trade rationally and employ strategies that align with their risk tolerance and market outlook. 

For example, buyers can make use of protective puts to guard against losses while also maintaining exposure to potential gains, and can use long calls as a cost-effective way to speculate on price increases.

Sellers, on the other hand, can use strategies such as covered calls or cash-secured puts to mitigate risks.

With covered calls, you sell call options on assets you already own, essentially generating profit through premiums, while the strategy with cash-secured puts is to always have enough cash to purchase the asset if assigned, which can greatly reduce the financial strain of fulfilling the contract.

Lastly, we’d always recommend that you spread your calls and puts across multiple assets, as a well-diversified portfolio can protect you against sudden and unfavorable price movements of a single asset.