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What Are Call and Put Options?

What are call and put options? Jacob Mintz, our options trading expert and chief analyst of Cabot Options Trader, explains in this detailed infographic.

While my first goal as chief analyst of Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster is to make subscribers money, my second goal is to share my options knowledge. I truly love the educational component of my role as I open stock traders’ eyes to the lucrative opportunities in options trading.

For example, why pay $8,100 for 100 shares of Micron Tech (MU) right before earnings when you can risk $360 on a call option and have almost identical upside exposure?

Or, if you want to bet against a high-flying IPO, don’t short the stock and have unlimited upside risk. Instead, you can buy a put and have your risk limited to the premium paid.

And while I can write about calls, puts and iron condors for pages, I know that many readers sometimes learn best via graphics and charts. With that in mind, here is an infographic that I hope will help demystify options. (You can also read the text version, below.)

What are call and put options? This infographic explains.

Demystifying Options, with Jacob Mintz

A Call Buy gives the buyer the right, but not obligation, to buy the stock at a pre-determined price and time.

A Put Buy gives the buyer the right, but not the obligation, to sell the stock at a pre-determined price and time.

The most you can lose on a Call or Put purchase is the premium paid. The risk is limited to that purchase price.

When to Buy Call or Put Options

When to buy a Call – feeling bullish about a stock or index

When to buy a Put – feeling bearish about a stock or index

Happy Options Trading Scenarios

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Call Buy - Stock goes higher = Profit is unlimited.

Put Buy - Stock goes lower = Profit is unlimited until the stock goes to zero

Unhappy Options Trading Scenarios

Call Buy – Stock goes lower or is little changed

Put Buy - Stock goes higher or is little changed

3 Outcomes of a Call Buy:

  1. Exercise the Call and take delivery of the stock at the strike price
  2. Sell the Call for a gain or loss
  3. Let the Call expire worthless (most you can lose is the premium paid)

3 Outcomes of a Put Buy:

  1. Exercise the Put and sell the stock at the strike price
  2. Sell the Put for a gain or loss
  3. Let the Put expire worthless (most you can lose is the premium paid)

Decoding Options: What Does it Mean?

XYZ January 100 Call (expiring 1/20/2023) for $5.50

  • XYZ - The stock the option is based on.
  • 100 Call – The Strike Price. This is the price you have the right, but not the obligation, to buy the stock at ($100).
  • $5.50 – The Premium you have to pay. And because contracts represent 100 shares of the stock, you actually pay $550 ($5.50 x 100 = $550)
  • (Expiring 1/20/2023) – That’s the date when the option expires.

How Do I Choose Which Option to Buy?

The longer an option has until its expiration the more it will cost as it has a greater likelihood of finishing in-the-money. Shorter-duration options cost less, as they are less likely to succeed.

In-the-money options cost more than out-of-the-money options as they have a greater likelihood of finishing in-the-money and success.

In-the-money call/put buys are high conviction trades as the premium paid is high.

Out-of-the-money call/put buys are lower conviction trades as the premium paid is small.

Cabot Options Trader, Options Trader Pro and Cabot Profit Booster

In both up markets and down markets, options provide investors with a way to make more money and hedge their risk.

My Cabot Options Trader advisory is currently closed to new subscriber (although there is a waitlist for prospective subscribers). Alternatively, you may want to consider the Cabot Profit Booster advisory to increase your portfolio returns.

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Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.