Introduction: What are Options?
Options are financial derivatives that give you the right (but not the obligation) to buy or sell an underlying asset at a specific price (strike price) before or on a specified date. The two basic types of options are Call options and Put options.
In this comprehensive guide, we explain the difference between both, show practical examples, and reveal how you can successfully trade options.
Call Options: The Right to Buy
What is a Call Option?
A Call option gives the buyer the right to BUY the underlying asset at the strike price. You profit from RISING prices.
Practical Example:
You buy a Call option on a stock currently trading at €100, with a strike price of €110. The option costs €5 (premium). If the stock rises to €130, you can buy it at the strike price of €110 and immediately sell it for €130 - a profit of €15 (€20 difference minus €5 premium)!
Advantages of Call Options:
- Unlimited profit potential (theoretically)
- Limited risk (only the premium)
- Leverage - large positions with little capital
- Ideal for bullish market expectations
Put Options: The Right to Sell
What is a Put Option?
A Put option gives the buyer the right to SELL the underlying asset at the strike price. You profit from FALLING prices.
Practical Example:
You buy a Put option on a stock at €100 with a strike price of €90. The option costs €4. If the stock falls to €70, you can buy it at market price and sell it at the strike price of €90 - a profit of €16 (€20 difference minus €4 premium)!
Advantages of Put Options:
- Profit from falling markets
- Portfolio hedging
- Limited risk (only the premium)
- Ideal for bearish market expectations
Direct Comparison
| Call-Option | Put-Option | |
|---|---|---|
| Right | To BUY | To SELL |
| Profit when | Rising prices | Falling prices |
| Market expectation | Bullish (↗) | Bearish (↘) |
| Max. loss | Premium | Premium |
| Max. profit | Unlimited | Limited (Strike - Premium) |
Ready to Start Options Trading?
Open your free Libertex account now and benefit from:
Only €100 minimum deposit - CySEC regulated - 3 million users worldwide
When to Use Which Option?
Use Call Options when:
- ▸You expect rising prices
- ▸You want to profit from a breakout
- ▸You want to use leverage for long positions
Use Put Options when:
- ▸You expect falling prices
- ▸You want to hedge your portfolio
- ▸You want to profit from market crises
Important Risks and Notes
- ▸Time Decay: Options lose value over time (Theta)
- ▸Total loss possible: You can lose the entire premium
- ▸Volatility: High fluctuations can affect your position
Start Your Options Trading Journey with Libertex
Register now and get access to over 350 trading instruments, Zero-Spread Trading and professional tools!
Register at Libertex now