The “Flavors”: Calls and Puts

Listed stock options come in two “flavors” — the right to buy stock (a call option, often referred to simply as a call) and the right to sell stock (a put option, often referred to simply as a put). It's useful to remember the terms by thinking of the option to buy stock as the right to call it away from the existing owner. The right to sell stock is the right to put the stock back into the market.

The owner of a call option gets to choose, that is, he has the option, whether to exercise his right and buy the underlying stock at the exercise price before the option expires. The seller of the call option has to sell the stock at the exercise price if the owner of the option elects to exercise it. In that case, the seller of the call option is required to sell the stock at the exercise price regardless of how far above the exercise price the stock is currently trading. In exchange for being willing to do so, he will collect an option premium in the form of cash when he sells the option. This cash is his to keep no matter what.

The owner of a put option gets to choose whether to exercise his right and sell the underlying stock at the exercise price before the option expires. The seller of the put option has to buy the stock at the exercise price if the owner of the put option elects to exercise it. In that case, the seller of the put option is required to buy the stock at the exercise price regardless of how far below the exercise price the stock is currently trading. In exchange for being willing to do so, he will collect an option premium in the form of cash when he sells the options. This cash is his to keep no matter what.

One note: no one keeps track of whom you actually bought your option from or whom you sold it to. Rather, all options that share the underlying stock, expiration date, strike price, and type (call or put) are identical, regardless of which exchange they were executed on or which brokerage executed them, so when it's time for you to exercise your call option, the Options Clearing Corporation, the clearinghouse for option trades, will more or less randomly pick someone who is short one of those options to satisfy the duty to you.

 
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