Options Quick Facts - Equity Calls & Puts

What are equity call options?

The buyer of an equity call option has purchased the right, but not the obligation, to buy 100 shares of the underlying stock at the stated exercise price at any time before the option expires. Once the option is purchased the buyer is then "long" the call contract, and to purchase 100 underlying shares he notifies his brokerage firm of his intent to exercise the call contract. For example, the buyer of one XYZ June 60 call option has the right to purchase 100 shares of XYZ stock at $60 per share up until June expiration.

Potential Profit: Unlimited as the underlying stock price increases
Potential Loss: Limited to premium paid for call

Long Call Graph

An investor who sells an option contract that he does not already own is known as the option "writer," and is then "short" the contract. The writer of an equity call option, commonly referred to as the "seller," has the obligation to sell 100 shares of the underlying stock at the stated exercise price if assigned an exercise notice at any time before the option expires. For example, the writer of an XYZ June 75 call option has the obligation to sell 100 shares of XYZ stock at $75 per share if assigned at any time until June expiration.

Potential Profit: Limited to premium received from call's initial sale
Potential Loss: Unlimited as the underlying stock price increases

Short Call Graph

What are equity put options?

The buyer of an equity put option has purchased the right, but not the obligation, to sell 100 shares of the underlying stock at the stated exercise price at any time before the option expires. Once the option is purchased the buyer is then "long" the put contract, and to sell 100 underlying shares he notifies his brokerage firm of his intent to exercise the put contract. For example, the buyer of one XYZ June 70 put option has the right to sell 100 shares of XYZ stock at $70 per share up until June expiration.

Potential Profit: Substantial and increases as the underlying stock price decreases to zero
Potential Loss: Limited to premium paid for put

Long Put Graph

An investor who sells an option contract that he does not already own is known as the option "writer," and is then "short" the contract. The writer of an equity put option, commonly referred to as the "seller," has the obligation to purchase 100 shares of the underlying stock at the stated exercise price if assigned an exercise notice at any time before the option expires. For example, the writer of an XYZ June 80 put option has the obligation to purchase 100 shares of XYZ stock at $80 per share if assigned at any time until June expiration.

Potential Profit: Limited to premium received from put's initial sale
Potential Loss: Substantial and increases as the underlying stock price decreases to zero

Short Put Graph

How can you use equity options?

Consider some of the benefits of equity options:

  • protection of stock holdings from a decline in market price
  • increased income against current stock holding
  • prepare to buy a stock at a lower price
  • benefit from a stock price rise...buying the stock outright

If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity. The decision as to what type of option to buy depends on whether your outlook for the underlying security is bullish or bearish. If your outlook is bullish, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value. Conversely, if you anticipate downward movement, buying a put option will enable you to either participate financially in a downward underlying stock move or to protect underlying shares against downside risk without limiting profit potential. Purchasing equity calls or puts allows you to position yourself according to your market expectations so that you may potentially profit and/or protect yourself with limited risk.