Call Options versus Put Options Explained
Jaap de Jonge, Management Consultant, Netherlands
An option is a legal agreement (contract) between 2 parties, in which one party acquires the right to trade an underlying security, at an agreed price, on or before a particular date.
The right to buy is called a "call option" while the right to sell is called a "put option".
Example 1: I give you the right to buy 100 apples from me before the end of the month for a price of $10. The right that you acquired is a "call option" or also simply a "call".
Example 2: I give you the right to sell 100 apples to me before the end of the month for a price of $10. The right that acquired is a put option or also simply a "put".
If you bought the above Call from me, you can make money when the value of apples is going up. Because you can still buy 100 apples from me for only $10.
On the other hand, if you bought the above Put from me, you will reap money when the price of apples is going down. Because you can still sell 100 apples to me for a nice $10.