STSM112070 - Derivatives: introduction to options: call and put options

A ‘call’ equity option contract and a ‘put’ equity option contract are two basic types of options.

Call Options

A ‘call’ option contract - gives the holder the right to buy the specified underlying securities from the option writer/issuer at an agreed price (commonly called the ‘strike’ price (see STSM112010)) within a specified future date.

A person who believes the open market price of a stock or share will increase may decide to buy the right to purchase the stock (i.e. a call option).

If the open market share price of the stock or shares at or before expiration of the option is above the combined agreed option ‘strike’ share price and premium paid for the option, the option holder is in profit and it is likely that they will exercise the option.

Put Options

A ‘put’ option contract - gives the holder the right to sell the specified underlying securities to the option writer/issuer at an agreed ‘strike’ price within a specified future date.

A person who believes the open market price of a stock or share will decrease may buy the right to sell the stock (i.e. a put option).

If the open market share price of the stock or shares at or before expiration of the option is below the combined agreed option ‘strike’ share price and premium paid for the option, the option holder is in profit and it is likely that they will exercise the option.