Call Options vs. Put Options: What is the Difference?

A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase an underlying asset—typically a stock—at a predetermined price, known as the strike price. For buyers of call options, this is often a bet that the price of the underlying security will rise before the expiration date. If the price exceeds the strike price, the buyer can exercise the option to buy the underlying asset at the strike price, potentially profiting from the difference. If the price does not rise above the strike price before expiration, the option will likely expire worthless, and the buyer loses the premium paid for the option.

On the flip side, selling call options involves taking on the obligation to sell the underlying asset at the strike price if the buyer decides to exercise the option. Sellers of call options typically do so because they expect the price of the underlying asset to decrease, or trade sideways, allowing them to keep the premium received from the sale without having to deliver the asset. However, if the asset’s price rises above the strike price, the seller may be forced to sell the asset (at the strike price), potentially incurring a loss. 

A put option is a financial contract that gives the buyer the right, but not the obligation, to sell an underlying asset—typically a stock—at a predetermined price, known as the strike price. For buyers of put options, this is often a bet that the price of the underlying security will fall before the expiration date. If the price drops below the strike price, the buyer can exercise the option to sell the asset at the strike price, potentially profiting from the difference. If the price does not fall below the strike price before the expiration date, the option will likely expire worthless, and the buyer loses the premium paid for the option.

On the flip side, selling put options involves taking on the obligation to buy the underlying asset at the strike price if the buyer chooses to exercise the option. Sellers of put options typically expect the price of the underlying asset to increase, or trade sideways, allowing them to keep the premium received from the sale without having to buy the asset. However, if the price drops below the strike price, the seller may be forced to buy the asset (at the strike price), potentially incurring a loss. 

Call and put options are both financial contracts that provide the buyer with specific rights related to an underlying asset, but they serve different purposes. A call option gives the buyer the right to purchase an asset at a predetermined price (strike price) within a set time frame. In contrast, a put option gives the buyer the right to sell the asset at the strike price. 

The key difference between the two lies in the type of position they enable. Call options are often used when the investor expects the value of the asset to increase, while put options are typically used when the investor expects a decrease in the asset’s value. Sellers of each type of option take on the opposite position and assume an obligation: call sellers must sell the underlying asset if the option is exercised, while put sellers must buy the underlying asset if the option is exercised.

When you buy a call option, you're essentially betting that the price of the underlying asset will rise. This gives you the right, but not the obligation, to buy the asset at a predetermined price (the strike price) before the option expires. If the price of the asset moves above the strike price, you can exercise the option to buy it (at the strike price) and potentially profit from the difference. Alternatively, you might decide to sell the option for a profit before it expires. Depending on one’s outlook and strategic approach, this may be advantageous, because the underlying could drop below the strike price prior to expiration, causing the option to expire worthless. 

On the flip side, when you buy a put option, you’re betting that the price of the underlying asset will fall. A put option gives you the right, but not the obligation, to sell the asset at the strike price before expiration. If the price of the asset drops below the strike price, you can exercise the option to sell it (at the strike price), profiting from the difference. If the underlying price doesn’t fall below the strike price, the option will expire worthless, and you will lose the premium amount paid to enter the position. Much like a call option, a put option position can also be sold (e..g closed) prior to expiration, which may be advantageous, depending on one’s outlook and strategic approach.

When you sell a call option, you’re taking on the obligation to sell the underlying asset at the strike price if the buyer decides to exercise the option. Sellers of call options typically expect that the price of the underlying asset will decrease, or trade sideways, as they aim to keep the premium received from selling the option, without having to deliver the asset. If the asset’s price rises significantly above the strike price, however, the seller will likely have to sell the asset at the strike price, potentially incurring a loss. Short call options are often used in conjunction with a neutral or bearish strategy, especially when one expects the underlying asset to either stay flat, or decline.

On the other hand, when you sell a put option, you’re agreeing to buy the underlying asset at the strike price if the buyer chooses to exercise the option. Sellers of put options typically expect that the price of the underlying asset will rise, or trade sideways, allowing them to keep the premium received from the sale, without having to buy the asset. However, if the asset’s price drops significantly below the strike price, the seller may be forced to buy the asset at a higher price than its market value, potentially incurring a loss. Short put options are often used in conjunction with a neutral or bearish strategy, especially when one expects the underlying asset to trade sideways, or rise in value. 

When you buy options, whether call or put, your risk is generally limited to the premium paid to enter the position. That means if the option expires worthless, you lose only the amount you paid for the option. On the other hand, selling options—whether calls or puts—introduces much more significant risks. As a seller, you're taking on the obligation to fulfill the terms of the option if the buyer decides to exercise it, exposing you to potentially substantial losses.

For call options, the risk is particularly high. When you sell a call option, you are agreeing to sell the underlying asset at the strike price if the buyer decides to exercise the option. If the price of the asset rises significantly above the strike price, you will be forced to sell the asset at a price much lower than its market value, potentially leading to material losses. Since there's no ceiling on how high the price of the underlying asset can go, the risk is theoretically unlimited. That makes selling call options especially risky, particularly in volatile markets, or when the underlying asset shows strong upward momentum.

For put options, the risk is still significant, but it operates slightly differently. When you sell a put option, you’re agreeing to buy the underlying asset at the strike price if the buyer exercises the option. If the asset’s price falls well below the strike price, you could end up buying the asset at a much higher price than its current market value, leading to significant losses. While the loss is theoretically capped (since the asset can’t fall below zero), the risk is still considerable, especially if the price of the asset declines sharply. As such, sellers of put options need to be prepared for the possibility of having to buy the asset at a loss, if the market moves against them.