Understanding the fundamental differences between call and put options
A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specified strike price before the option expires.
A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified strike price before the option expires.
You buy a call option for stock XYZ with a strike price of $50, expiring in one month, for a premium of $2 per share (contract size 100 shares = $200 total).
If XYZ rises to $60: You can exercise the option to buy at $50 and immediately sell at $60, making $10 per share profit minus your $2 premium = $8 net profit per share ($800 total).
If XYZ stays below $50: The option expires worthless and you lose your $200 premium.
You buy a put option for stock ABC with a strike price of $30, expiring in one month, for a premium of $1.50 per share (contract size 100 shares = $150 total).
If ABC falls to $20: You can buy shares at $20 and exercise the put to sell at $30, making $10 per share profit minus your $1.50 premium = $8.50 net profit per share ($850 total).
If ABC stays above $30: The option expires worthless and you lose your $150 premium.