Options are derivatives that allow investors to exchange the right to buy or sell a specific security at a specific price. There are two primary types of options: call options and put options.
Call Options give the holder of the contract the right to purchase the underlying security, while Put options give the holder the right to sell shares of the underlying security. Both can be used to let investors profit from movements in a stock’s price. However, there are very important differences in how they work.
The most important difference between call options and put options is the right they confer to the holder of the contract.
When you buy a call option, you’re buying the right to purchase shares at the strike price described in the contract. You’re hoping that the stock’s price will rise above the strike price of the option. If it does, you can buy shares at the strike price, which is lower than the current market price, and sell them immediately for a profit.
When you buy a put option, you’re buying the right to sell shares at the strike price outlined in the contract. You’re hoping for the underlying stock’s price to decrease. If the stock’s price falls below the strike price, you can sell the shares at a higher price than what those shares are trading for in the market and earn a profit.