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The options markets · lesson 2 of 20

Calls and puts

There are two types of option. A call gives the right to buy the underlying at the set price. A put gives the right to sell it.

The buyer of a call gains if the price of the underlying rises enough. The buyer of a put gains if the price falls enough. In both cases the move must exceed the premium paid.

Calls and puts can be bought or sold. This gives four basic positions, with very different risk profiles: buying an option limits the loss to the premium, selling one exposes you to losses that can be much greater.

Questions

1. Which right does a call give?

The right to buy the underlying at the set price

A put instead gives the right to sell.

2. When does the buyer of a put gain?

When the price falls enough

The fall must exceed the premium paid.

3. Which position limits the loss to the premium?

Buying an option

The buyer risks only what they have paid.

Next lesson: Strike, expiry and premium

Continue from lesson 4

The options markets: an online course in 20 short lessons with quizzes and a final certificate, on Unicorn Academy.

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