{"id":509372,"date":"2022-10-30T13:47:53","date_gmt":"2022-10-30T11:47:53","guid":{"rendered":"https:\/\/www.etoro.com\/?page_id=509372"},"modified":"2025-11-03T15:26:12","modified_gmt":"2025-11-03T13:26:12","slug":"what-are-puts-and-calls","status":"publish","type":"page","link":"https:\/\/www.etoro.com\/en-us\/options\/what-are-puts-and-calls\/","title":{"rendered":"Put vs. Call: What\u2019s the difference?"},"content":{"rendered":"\n

Ready to learn about options? In this article, we\u2019ll walk you through some of the basic terminology and strategies surrounding options.<\/p>\n\n\n\n\n\n\n

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Call and put options offer ways for traders to speculate on whether they think an asset price will go up or down. The mechanics of these two types of options<\/a> work in a similar way, and help you to get exposure to a market by putting forward a relatively small initial capital outlay.<\/strong><\/p>\n\n\n\n

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Options are a derivative<\/e-tip> instrument, which means that their value is derived from an underlying<\/e-tip> asset. However, that derivative structure also means that there are different options strategies you can use, depending on what your goals are or how you think the market will move.<\/strong><\/p>\n\n\n\n

What are calls?<\/h2>\n\n\n\n

Calls may be the best-known type of option. They offer the option holder the chance to purchase an underlying asset at a predetermined strike price. If the strike price is lower than the market price when the option expires, that is advantageous for the option holder, but not for the option seller who needs to make delivery of the underlying asset.This means the best time to buy a call option would be when you expect the price of the stock to go up before the expiry date.<\/mark><\/p>\n\n\n\n

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Tip:<\/strong> One call option in a stock will give you the right to buy 100 shares.<\/p>\n<\/div><\/div>\n\n\n\n

There are four potential outcomes once you purchase your call option.<\/p>\n\n\n\n

    \n
  1. Profit<\/li>\n\n\n\n
  2. Breakeven<\/li>\n\n\n\n
  3. Partial loss<\/li>\n\n\n\n
  4. Total loss<\/li>\n<\/ol>\n\n\n\n

    We\u2019ll start with breakeven<\/strong>, since that acts as the baseline for the rest of the outcomes. Essentially, breakeven is the point where the money you put in is the same as the money that comes out. You didn’t make any money, but you also didn’t lose any either \u2014 you\u2019re left with net zero on your investment.<\/p>\n\n\n\n

    A trade\u2019s breakeven point is the strike price plus the option premium. Let\u2019s look at a hypothetical scenario of an option approaching its expiry date:<\/p>\n\n\n\n

    You buy a call option for 100 shares of your target stock.<\/strong><\/p>\n\n\n\n

    Strike price: $10\/share<\/strong><\/p>\n\n\n\n

    Option cost (premium): $100<\/strong><\/p>\n\n\n\n

    The stock price then rises to $11 \u2014 past your $10 strike price.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    As exciting as the news is, you haven\u2019t quite reached the profit point yet. Why? Because $11 is your breakeven point. You made $100 ($1 for each of your $100 shares), but you spent $100 to buy the option in the first place. That leaves you with net zero. <\/p>\n\n\n\n

    Of course, it\u2019s rare for a stock to land exactly <\/em>on your breakeven point at the time your option expires. That leads us to the other three scenarios.<\/p>\n\n\n\n

    Let\u2019s continue with the most favorable outcome: a profitable trade. <\/p>\n\n\n\n

    In order to profit on a call option, the price of the underlying stock needs to move above your breakeven point.<\/p>\n\n\n\n

    For every $1 above the breakeven point the stock moves, in theory, you\u2019d get $1 for every share in profit. If we go back to our previous scenario, that means a move to $12 makes you $100. If it goes up to $15, you\u2019ll make $400. At $21, you\u2019d make $1,000. This demonstrates how small changes in share price can add up to large amounts of value \u2014 once you pass that profit point.<\/p>\n\n\n\n

    But what about the other side? Well, if the stock never reaches your strike price, you lose the whole investment \u2014 that\u2019s considered a total loss<\/strong>. But, you can rest easy knowing that in almost all situations, your initial investment is usually the most you\u2019ll lose.<\/p>\n\n\n\n

    And what about the space between your strike price and your breakeven point? In our previous scenario, that would be the price between $10 and $11 \u2014 let\u2019s say it lands on $10.50 at the time of expiry. In this case, you\u2019d experience a partial loss. You made $50, but you originally put in $100 \u2014 so you\u2019d still be losing $50 overall. While no trading loss is ever welcome, it compares well to what your losses could have been had you taken a position of 100 shares of the underlying stock.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    The terms \u201cin the money\u201d and \u201cout of the money\u201d are used to describe options and profitability. Put simply, \u201cin the money\u201d means that the stock price has surpassed the strike price \u2014 meaning that you are in partial loss, breakeven, or profit territory. \u201cOut of the money\u201d means the stock price has not met the strike and on expiry date, the trade will be a total loss.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    What are puts?<\/h2>\n\n\n\n

    Puts work on the other end of the spectrum. When you buy a put, you\u2019re reserving the right to sell shares<\/strong> at, hopefully, a higher price than they are trading at (when the option expires).<\/p>\n\n\n\n

    There are two main times that you might want to buy a put. The first is when you expect the price of the stock to go down. The second would be as a hedge<\/e-tip> \u2014 if you invest in a lot of stock, but aren\u2019t confident that it\u2019s going to go up, you could buy a put as a way to lower your risk, since you\u2019ll make some money back if the price drops enough.<\/mark><\/p>\n\n\n\n

    Just like calls, puts have four outcomes:<\/p>\n\n\n\n

      \n
    1. Profit<\/li>\n\n\n\n
    2. Breakeven<\/li>\n\n\n\n
    3. Partial loss<\/li>\n\n\n\n
    4. Total loss<\/li>\n<\/ol>\n\n\n\n

      But in this case, the profit begins when the stock goes below your breakeven point, rather than above it.<\/p>\n\n\n\n

      \"\"<\/figure>\n\n\n\n

      Let\u2019s go back to our previous example, except this time, you think the stock price is going to drop below $10:<\/p>\n\n\n\n

      You buy a put option for 100 shares of a stock you think will decline.<\/strong><\/p>\n\n\n\n

      Strike price: $10\/share<\/strong><\/p>\n\n\n\n

      Option cost (premium): $100<\/strong><\/p>\n\n\n\n

      Let\u2019s say the stock then drops to $9. You would make $100 ($1 for each of your $100 shares), but you spent $100 on the put in the first place, once again putting you at net zero. Again \u2014 not great, not bad, just okay.<\/p>\n\n\n\n

      \"\"<\/figure>\n\n\n\n

      Now, let\u2019s say that stock dropped to $8. At this point, you\u2019ve made $200 \u2014 minus the original $100 cost \u2014 meaning you\u2019ve made $100 profit. <\/p>\n\n\n\n

      At $7, that grows to $200 of profit. At $1, you\u2019d make $800 in profit. The lower the stock goes, the more money you would make. <\/p>\n\n\n\n

      That means that between $9 and $10 puts you in the partial loss scenario, and anything above $10 will create a total loss situation. But just like a call, this total loss is (usually) limited to your original investment in the option* \u2014 in this case, the $100 premium \u2014 because you can simply choose to let the option expire.<\/p>\n\n\n\n

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      Tip:<\/strong> Although rare, there are certain cases in which you may be exposed to greater loss than your initial investment.<\/p>\n<\/div><\/div>\n\n\n\n

      \"\"<\/figure>\n\n\n\n

      For a put, \u201cin the money\u201d and \u201cout of the money\u201d mean the same thing as they do for a call. If you\u2019re \u201cin the money,\u201d the stock has dropped below your strike price (partial loss, breakeven, or profit); if you\u2019re \u201cout of the money\u201d on expiry date, you\u2019ll have a total loss.<\/p>\n\n\n\n

      Final thoughts<\/h2>\n\n\n\n

      Different options can help you build out your portfolio in different ways, but all of them require some kind of opinion about the market and some hands-on activity. <\/strong>Once you understand how puts and calls work, you can use them to gain exposure to different markets by only putting forward a relatively small amount of capital.<\/p>\n\n\n\n

      Learn more about ways to use put and call options by visiting the eToro Academy<\/a>.<\/p>\n\n\n\n

      Quiz<\/h2>\n\n\n\n
      \n
      What type of option should you buy if you think the price of a stock is going to fall?<\/div>\n
      A put option<\/div>\n\n\n\n
      A call option<\/div>\n\n\n\n
      A naked call option<\/div>\n<\/div>
      \u00a0<\/div><\/div>\n<\/div>\n\n\n\n
      \n
      Buying put options to manage the risk that a market correction might reduce the value of the rest of your portfolio is known as?<\/div>\n
      Spreading<\/div>\n\n\n\n
      Hedging<\/div>\n\n\n\n
      Leveraging<\/div>\n<\/div>
      \u00a0<\/div><\/div>\n<\/div>\n\n\n\n\n\n

      FAQs<\/h2>\n\n\n\n
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      Can you use calls and puts in the same strategy?<\/dt>
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      There are some strategies which involve simultaneously opening positions in calls and puts. One is a long straddle which involves buying a call and a put option in the same underlying stock<\/a> with the same strike price and expiry date.<\/p>\n<\/dd><\/div>\n\n\n\n

      Can you make greater returns from calls than puts?<\/dt>
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      The upside on a put option trade is capped at the underlying instrument reaching a price of zero. A long position in call options on the other hand generates returns when prices rise, and since there is technically no limit on how high a stock price can go, there is potential for greater returns.<\/p>\n<\/dd><\/div>\n\n\n\n

      What is the put-call ratio?<\/dt>
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      The put-call ratio is a calculation that divides the number of traded put options by the number of traded call options. Once you establish the long-term ratio, you can identify if the ratio is currently above or below the long-term average<\/a>. If the ratio is higher than it typically is, that shows more puts are being bought, which is a bearish sign, and vice versa.<\/p>\n<\/dd><\/div>\n<\/dl>\n\n\n\n\t\t