Stock Options Explained: Puts, Calls, and How They Work

Stock options are financial contracts that give the holder the right — but not the obligation — to buy or sell a specific stock at a predetermined price (the strike price) before a specific date (the expiration date). ## The Two Types **Call options:** The right to BUY shares at the strike price. Profitable when the stock rises above the strike price plus the premium paid. Buyers of calls are bullish — they profit from upward price movement. **Put options:** The right to SELL shares at the strike price. Profitable when the stock falls below the strike price minus the premium paid. Buyers of puts are bearish — they profit from downward price movement, or use puts as insurance on existing stock holdings. ## Key Terms **Strike price:** The predetermined price at which the option holder can buy (call) or sell (put) the underlying shares. **Premium:** The price paid to purchase the option. This is the maximum loss for an option buyer — if the option expires worthless, you lose only the premium. **Expiration:** Options have a fixed lifespan. After expiration, unexercised options become worthless. Common expirations range from weekly to over a year (LEAPS). **Assignment:** When an option is exercised, the seller (writer) must fulfill the contract — delivering shares (for calls) or buying shares (for puts). ## Buying vs Selling Options **Buying options:** Limited risk (you can only lose the premium), unlimited potential profit (for calls) or profit up to the strike price (for puts). Most purchased options expire worthless. **Selling (writing) options:** Collect premium upfront as income. Limited profit (the premium collected), but potentially large losses — a sold call has theoretically unlimited loss if the stock rises indefinitely; a cash-secured put risks being assigned shares at a price far above market value during a crash. ## Common Strategies **Covered calls:** Own 100 shares, sell a call above your cost basis. Collect premium income. If the stock rises above the strike, shares are called away at a profit. If it stays below, keep shares and premium. **Cash-secured puts:** Set aside cash to buy shares at the strike price, sell a put. Collect premium. If the stock drops below the strike, you buy shares at an effective discount (strike minus premium). If it stays above, keep the premium. **The wheel strategy:** Alternates between selling puts and covered calls — a systematic income generation approach. AI-Assisted Stock Trading Bots: Alpaca API, Congressional Copy Trading, and the Wheel Strategy Dollar Cost Averaging and Drawdowns: Why Market Drops Build Long-Term Wealth