Call Option vs Put Option: A Complete Guide for Traders

Options trading is one of the most versatile tools in the share market, allowing traders to profit from both rising and falling prices. Having a clear idea of the basics is integral to trading any market. With options, understanding the difference between a call option vs put option is fundamental.

This guide explains call option and put option concepts in depth, covers payoff structures, compares risks and rewards, and helps traders decide when to use calls or puts in real market conditions.

What Is Option Trading and How Does It Work?

Option trading involves contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a predetermined expiry date. These contracts typically have equity, index, forex, oil, gold, and other commodities as their underlying assets.

Key concepts of option trading are:

Each option contract consists of the following key components:

What Is a Call Option?

A call option gives the buyer the right to purchase the underlying asset at a fixed price, known as the strike price, on or before the expiry date. Traders typically buy call options when they expect the asset's market price to increase within a specified time period.

How a Call Option Works

A call option works by allowing the buyer to benefit from rising prices. When a trader purchases a call option, they select a strike price and an expiry date and pay a premium to acquire the contract. This premium is the option's cost and represents the buyer’s maximum risk.

If the market price of the underlying asset moves above the strike price during the life of the option, the call option starts gaining value. As the difference between the market price and the strike price increases, the intrinsic value of the option also increases. The trader can either exercise the option to buy the asset at the lower strike price or sell the option in the market to realize the profit.

Example of a Call Option Trade

If the price rises to 115, the intrinsic value becomes 10.
Net profit = 10 - 3 = 7
If the price stays below 105, the call option expires worthless.

Call Option Payoff Structure

Call option payoff follows an upward-sloping curve:

What Is a Put Option?

A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price on or before the option’s expiry date. Traders generally use put options when they expect the cost of an asset to decline within a specific time frame.

How a Put Option Works

By purchasing a put option, the trader secures a selling price in advance, allowing them to benefit from falling market prices without shorting the underlying asset. If the market price drops below the strike price, the put option increases in value, reflecting the advantage of being able to sell the asset at a higher fixed price.

If the market price remains above the strike price until expiry, the put option expires worthless. In this case, the trader’s loss is limited strictly to the premium paid for the option. This predefined risk makes put options a popular choice for individuals and institutions trying to capitalize on bearish movements and investors looking to hedge existing positions against downside risk.

Example of a Put Option Trade

If the price drops to 85, intrinsic value becomes 10.
Net profit = 10 - 4 = 6
If the price remains above 95, the loss is limited to the premium.

Put Option Payoff Structure

The put option payoff follows a downward-sloping curve:

Difference Between Call Option and Put Option

Understanding the difference between a call option and a put option helps traders select the appropriate strategy based on market direction.

Call Option vs Put Option Comparison Table

This comparison clarifies how puts and calls serve different objectives in option trading strategies.

Call and Put Options: When and Why Traders Use Them

Whether buying (going long) or selling (going short) call or put options, the strategy and use cases differ.

When to Use Call Options

When to Use Put Options

Common Call Put Option Strategies

Advanced traders combine calls and puts to build multi-leg strategies using professional tools on modern trading platforms.

Risks, Rewards, and Key Factors to Consider Before Trading Options

Risks in Call and Put Options

Key Factors Affecting Option Prices