Skip to main content

A Summary of Calls and Puts

Summarising Call & Put Options​

Call and put options form the foundation of options trading. There are four key variants:

  1. Buying a Call Option: You profit when the market moves above the strike price. Risk is limited to the premium paid, and profit potential is unlimited.
  2. Selling a Call Option: You collect the premium, but risk unlimited losses if the market rises.
  3. Buying a Put Option: Profits are realised when the market moves below the strike price. Losses are limited to the premium paid.
  4. Selling a Put Option: You collect the premium but risk unlimited losses if the market drops below the strike price.

Payoff Diagrams​

  • Buying a Call/Put Option: Offers unlimited profit potential with limited downside risk.
  • Selling a Call/Put Option: Limited profit (premium collected) with unlimited loss potential.

Market Conditions and Strategies​

When trading options, you’ll encounter different market conditions:

  • Bullish Market: Buying a call or selling a put is suitable.
  • Bearish Market: Selling a call or buying a put is ideal.

Traders often combine these four variants to create complex strategies that manage risk and optimise potential returns.

Key Takeaways​

  1. Call Buyers: Expect the market to rise and benefit from an upward price movement. Risk is limited to the premium, and potential profit is unlimited.
  2. Put Buyers: Profit from a declining market. Risk is limited to the premium paid, with significant profit potential if the market falls sharply.
  3. Call Sellers: Expect the market to remain flat or fall. Profit is capped at the premium received, while the risk is theoretically unlimited.
  4. Put Sellers: Profit when the market remains flat or rises. Risk is substantial if the market drops significantly, while profits are limited to the premium.

Understanding Premiums​

Option premiums fluctuate based on several factors, including the underlying asset’s price, time to expiry, and market volatility. Premiums are influenced by a set of variables called Option Greeks, which affect the price in real-time.

AlgoTest traders can use the Strategy Builder to construct various option strategies and the Simulator to test them using historical data.