2. What Are Stock Options?

Calls vs Puts 

call option is a bullish bet on a stock. When buying a call option, a trader is betting that the underlying stock will increase in value.

If you think the rally in tech stocks will continue, you might purchase QQQ calls that expire in 3 months with a strike price 30% above the current QQQ share price.

Calls of this nature are ‘out of the money’ (OTM), meaning that they will expire worthless unless the underlying stock rises above the strike price by expiration.

If the stock price is above the strike at expiration, the call option will be ITM and the contract holder can buy (or ‘call’) 100 shares away from the option writer at the strike price.

As you can see, this exposes option writers to significantly more downside risk than option buyers. More on that later. 

put option is a bearish bet on a stock. Put options are purchased when the buyer thinks the underlying stock will decrease in value over a specific time period.

But unlike a call option, a put option gives the buyer the choice to sell a security at the predetermined strike price.

If a put option expires ITM, it means the stock has declined and the buyer will have the right to ‘put’ 100 shares on the writer at the strike price, collecting the difference in profit.

If you buy a $275 QQQ put and the share price is $250 at expiration, the buyer can sell 100 shares to the writer at $275 and buy back the shares from their broker at $250, collecting a profit on the difference. 

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