Call and put options: knowing the difference in London

A call option gives the holder the right to purchase company shares at a predetermined price within a set time frame. The contract will also specify the number of shares that you can purchase.

A put option is very similar to a call option, but instead of giving the holder the right to buy shares, it gives them the right to sell shares. The holder will also have a strike price and a set time frame to exercise their option.

The expiration date

When options trading UK, the expiration date is the last day when the holder of a call or put option can exercise their entitlement to buy or sell shares. The expiration date for a call option is always later than the expiration date for the corresponding put option.

The premium

The premium is the price that the holder pays for the option. Call options are more expensive than put options because the holder can profit more significantly.

The strike price

The strike price is when the holder can buy or sell shares, depending on whether they have a call or put option. The strike price for call options is always higher than the current market price of the shares. The strike price for put options is always lower than the current market price of the shares.

The underlying asset

The underlying asset is the security that the option is based on. The underlying asset is the company whose shares are purchased for a call option. The underlying asset is the company whose shares are sold for a put option.

The right to exercise

The holder of an option has the authority to exercise their contract at any time until the expiration date. Meaning they can buy or sell shares at the strike price, regardless of whether the share price has moved above or below it. You can only exercise call options if the share price is above the strike price. In contrast, you can only exercise put options if the share price is below the strike price.

Margin requirements

The margin requirement is how much money the holder must deposit with their broker to buy or sell shares. It is used as security if the holder loses money on their investment. Call options have a higher margin requirement than put options because they are riskier.

Tax implications

The tax implications of options can be complex and vary depending on the country. However, call options are more advantageous for the holder than put options because they are taxed as capital gains rather than income.

The bid-ask spread

The bid-ask spread is the difference in the price of what a broker is willing to pay for shares and what they are willing to sell them at. This is how the broker makes their money. The wider the bid-ask spread, the less favourable the option is for the holder.

The liquidity

The liquidity of an option refers to how easy it is to buy or sell. Options traded on major exchanges have high liquidity because there is high demand. Options traded over-the-counter (OTC) have low liquidity because there is little demand for them. Call options are more liquid than put options because they demand more.

The time value

The time value is the difference between the premium and the intrinsic value. The time value represents the amount of money that the holder would lose if they sold their option right now. It decreases as the expiration date approaches because the holder loses more and more time value as they get closer to expiration. Call options have more time value than put options because the holder has more time to profit.

The type of market

The type of market refers to whether the option is traded in a bull or bear market. A bull market is when prices increase, and a bear market indicates price decreases. Call options will be more profitable than put options in a bull market. Put options will be more profitable than call options in a bear market.