You can think of a call option as a bet that the underlying asset is going to rise in value. The following example illustrates how a call option trade works.

Assume that you think XYZ stock is going to trade above $30 per share by the expiration date, the third Friday of the month. So you buy a $30 call option for $2, with a value of say $200, plus commission, plus any other required fees.

If you’re right, and XYZ is up to $35 per share by the expiration date, you can exercise your option, buy 100 shares of XYZ at $30, which costs you $3,000, and then sell it on the open market at $35, realizing a gain of $500 minus your initial $200 premium, commissions, and other fees.

In this case, your option is in the money, because the strike price is less than the market price of the underlying asset. Note that when the stock price goes up, your call option value goes up.

The other more common move is for you to sell the option back to the market at a profit.

Note that most options never are exercised. Instead, most traders sell the option back to the market.


Put options are bets that the price of the underlying asset is going to fall. Puts are excellent trading instruments when you’re trying to profit from the downward price movement of a stock (or futures contract).

Here is a typical situation where buying a put option can be beneficial: Say, for example, that you see stock XYZ at $31 and you feel that it is headed downward. Keep in mind that put options work in the mirror opposite way that call options do; when the stock price goes down, your put option value goes up. So if the stock price falls to say $25 by the expiration date, you can then sell the put to the market and profit from the appreciation of the option.

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