Call Option is the right to buy a stock at a certain price. The strike price is the price where the buyer of the option has the right to exercise, and thus, purchase the stock. The buyer of an option is generally bullish because a buyer believes the stock price will eventually exceed the strike price prior to expiration. The seller of a Call Option, has the obligation to sell the stock to the buyer of the call option at the strike price if the option is exercised. Since the seller received the premium, a seller is generally bearish and believes the stock price will not achieve the strike price, thus having the option expire worthless. A Call Option is generally abbreviated with the letter C.
Put Option is the right to sell a stock at a certain price. It is the exact opposite of a Call option in many ways. The strike price is the price where the buyer of the option has the right to exercise, and thus, sell the stock at this price. The buyer of this option is generally bearish and will use a put option as a hedge to existing stock or to profit from the decline of a stock. The seller of a Put Option is generally bullish because a seller wants the stock price to be higher than the strike price. In this case, the option will become worthless at expiration. If at expiration, the strike price is higher than the stock price, the buyer of the put option can “put” the stock to the seller and sell the stock at the strike price and immediately buy it at the current stock price. A Put Option is generally abbreviated with the letter P.
