Differences between Call Options and Put Options
The terminologies of Call and Put are associated with Option contracts. An option contract is a form of a contract or a provision which allows the option holder the right but not an obligation to execute a specific transaction with the counterparty (option issuer or option writer) as per the terms and conditions stated. An option is considered as a derivative contract since its value is derived from an underlying security.
In this article, we look at the key differences between Call Options and Put Options –
- Call Options vs Put Options Infographics
- Key Differences – Call Options vs Put Options
- Call Options vs Put Options (Comparison Table)
- Conclusion – Call Option vs Put Option
Also, have a look at Option Strategies
Call Options vs Put Options Infographics
Let us look at some of the basic differences between Call Option and Put Option in a nutshell:
Key Differences between Call Options and Put Options
Despite the above, there are many differences which set apart Call Option vs Put Option:
- The buyer of a call option has the right but is not necessarily obligated to buy pre-decided quantity at a certain futuristic date (expiration date) for a certain strike price. Conversely, put options will empower the buyer with the right to sell the underlying security for the strike price at a futuristic date for a pre-determined quantity. However, they are not obligated for the same.
- A call option permits buying of an option whereas a put option will permit selling of an option.
- Call option generates money when value of the underlying asset is rising upwards whereas Put option will extract money when value of underlying is falling.
- As a continuation of the above, the potential gain in a call option is Unlimited due to no mathematical limitation in rising price of any underlying whereas the potential gain in a put option will mathematically restricted.
- Despite being bound by a single contract, the investor of a call option will look for a rise in the price of a security. Conversely, in the put option the investor expects the stock price to fall down.
- Both call and put options can be In the Money or Out of the Money. In case of call option the underlying asset price is above the strike price of the call. Out of the money indicates underlying asset price is below the call strike price. Another aspect is ‘At the Money’ meaning strike price and underlying asset price is the same. The premium amount will be higher for ‘In the Money option’ since it has an intrinsic value whilst premium is lower for Out of the Money call options.
With respect to put options, In the Money indicates underlying asset price below the strike price. Out of the Money is when the underlying asset price is above the put price. The premium amount for ‘In the Money’ option will be higher but the expectation of ‘in the money’ in this case is opposite to what it was in call option.
- Buying a call option requires the buyer to pay a premium to the seller of the call option. However, no margin has to be deposited with the stock exchange. However, selling a put requires the seller to deposit margin money with the stock exchange which offers the advantage to pocket the premium amount on the put option.
Call Options and Put Options Comparison Table
|Basis for Comparison – Call Option vs Put Option||Call Option||Put Option|
|Meaning||It offers the right but not obligation to buy the underlying asset at a particular date for the pre-decided strike price||It offers the right but not the obligation for selling the underlying asset at a particular date for the pre-decided strike price.|
|Investor Expectations||Rise in the Prices||Fall in the prices|
|Profitability||The gains can be unlimited since price rise cannot be capped||Gains are limited since price can fall steadily but will stop at Zero.|
|Permits||Buying the stock||Selling of Stock|
|Analogies||Considered a security deposit allowing taking a product at a certain fixed price.||It is like an Insurance offering protection against a loss in value.|
Entering into a call or put option is an entire game of speculation. If one has trust on the movement of the price of the underlying asset and is ready to invest some money with an appetite to bear the risk of premium amount, the gains can be substantially large. In terms of the Indian options market, a contract expires on the last Thursday of the month before which the contract should be executed else contract can be allowed to expire worthless with the premium amount foregone.
Thus, it completely depends on the risk appetite of the investor and the faith in the direction of the price movement of the underlying asset for which the option contract is undertaken. Call option and put options are two exactly opposite terms and a combination of speculation and financial ability will help in extracting maximum financial gains.
This has been a guide to top differences between Call Options and Put Options along with its comparative table and infographics. You may have a look at below suggested readings to enhance your knowledge of derivatives.
- Forwards vs Futures | Top Difference
- What are Options? Complete Beginner’s Guide!
- Put-Call Parity
- Writing Put Options
- Commodity Derivatives