Better terms to use to understand Puts and Calls for options trading

Question

I've been trying to learn a little about options trading, specially puts and calls.

The term options works well for my brain because someone is buying or selling the option to buy or sell something. So far, so good.

But the terms put and call do not currently register with my brain too well. I'm not planning on changing the industry lingo or anything, but are there other words that people can use in their own heads as replacements for those two terms that might make understanding (and remembering) puts and calls easier and more obvious?

Answer 1

This is maybe kind of stupid, but it's a mnemonic device that worked OK for me to get the hang of these two varieties of option. It may only work for American English in my particular region, so if it doesn't immediately help it might be better to abandon:

You might call someone up, and you might put someone down. These are idiomatic in the English I've always been exposed to, and the reverse phrases are not very common at all.

A call is the idea that the price of the underlying will go up. A put is the idea that the price of the underlying will go down. Whether you're buying or selling either option type the logic for the rest isn't too bad to work out if you forget specifics, as long as you can remember those two points. You just have to keep straight who is the buyer and who is the seller!

I don't know how good of an idea it is to use mental shortcuts for much beyond remembering which term goes with which situation-- it's almost certainly better to have a solid, more-direct understanding of options trading before actually doing it yourself.

Answer 2

The owner of a call has the right to buy the underlying at the strike price any time before expiration.

The seller of that call has the obligation to sell the underlying at the strike price if an owner exercises the call (the seller is assigned).

The owner of a put has the right to sell the underlying at the strike price any time before expiration.

The seller of that put has the obligation to buy the underlying at the strike price if an owner exercises the put (the seller is assigned).

No matter how you cut it, you have to learn the above details. Perhaps this anecdotal explanation might help:

In common parlance, when someone says, "I put it to him", it generally means that you sent something their way. So if the owner exercises a long put, he's putting the stock to someone else, making him buy it.

In finance, the word call generally refers to getting something. For example, after 5 years most preferred stocks are callable by the company. In other words, they call/redeem (buy) the shares back for the issue price. For options, the owner of the call is saying something similar - I'm calling (buying) your shares at the agreed upon contract prices.

I would suggest that while learning this, you focus on calls only. When you understand them clearly, then turn to puts because for the most part, they're just the mirror image of calls but in the opposite direction.

Answer 3

Not really answering your question, but I think it's better just to remember the existing words that are used.

PUT option

I have a stock, I have the option to put it back on the market. Like I would put the milk in the fridge.

CALL option

I don't have a stock, but I have the option to call one to me. Like I would call a dog to me.

Answer 4

If you understand the principle of options - that you can profit from a price rise (a long position) or from a price drop (a short position), then there is a trivial mnemonic to remember which is which:

Call has 4 letters, and put has only 3 (shorter word!) - therefore a call is long, and a put is short!

Answer 5

Call is an Option-to-buy (at a given price by a given time)

Put is an Option-to-sell (at a given price by a given time)

And, you can buy or sell either one. When I buy a call, there is a trader at the other side of that trade, selling that call to me.

Loads of Q&A here regarding options. The mechanics of trading is simple, the valuation is where the tough math comes in.

Answer 6

Think about an option as an insurance contract that protects you from something bad happening to you. For instance, if you plan to buy some stuff in the future the bad thing that can happen is the price increasing. So you can buy a call option to protect yourself from the price going over a certain limit.

If you want to sell something in the future you’d need insurance against a drop in price so you buy a put option to make sure that you don't lose if the price goes below a certain limit. Insurance is never free, so you have to pay a premium for your safety. This gives you calls and puts bought.

Now if you want to make money on other people’s fears, you can sell the insurance to them, getting the premium in return but risking your own money if the price doesn’t behave. This gives you calls and put sold.

Some people struggle to see the difference between call option bought and put option sold. I think the above parallel makes it much clearer.

Answer 7

Calls are coupons

A coupon allows the bearer to purchase something at a pre-defined price up to a pre-defined expiration date. One would typically buy such a coupon if they believed the value of the underlying will increase within the timeframe.

If you buy a call contract, you are buying a coupon that has value in that you can buy shares at a predetermined price, up until a predetermined date. The value of this contract will fluctuate based upon the current sale price of the underlying, the time left, and the chances that the underlying price moves up significantly.

Writers of these coupons will price them such that the likelihood of the underlying increasing in value within the given timeframe is low enough for them to profit. If they are assigned they are forced to sell the underlying at the predetermined price.

Puts are insurance

Insurance entitles the bearer to a payout for some underlying that depreciates in value within some given time frame. One would typically buy insurance if they believed the value of the underlying will decrease within the given timeframe.

Think of a put as contract where somebody agrees to buy something from you at an agreed upon price, but they give you the option to choose if and when to sell it. An insurance policy, so to speak.

Writers of these insurance contracts will price them such that the likelihood of the underlying going down in value within the given timeframe is low enough for them to profit. If they are assigned, they will be forced to purchase the underlying for the predetermined price.