What is the difference between a call option and put option?

An option is a financial instrument that gives you the right but not the obligation to buy or sell a specific underlying financial instrument at a specific price within a set period of time.

All “financial instrument” means is something that can be bought and sold. Once you buy an option, you can resell it to another investor for a profit or loss.

Also, notice that options give you a “right” — not an obligation. That is, you choose whether or not you want to exercise that right. An option gives you “the right to buy or sell a specific underlying instrument”… but not both.

When you buy the option, you must choose whether you expect to profit from a rise or fall in the price of the underlying stock.

If you expect the stock to rise, you buy what’s called a “call option.”

If you expect it to fall, you buy a “put option.”

But first, there are a few things you should know…

Every stock option — no matter what stock it’s for — allows you to control 100 shares of stock. Unlike when you buy a stock, however, buying options limits your risk. You lose only the amount you paid to buy the options. And your profits are practically limitless.

For more information on options investing, click here to view our primer.

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