Calls and puts: the two building blocks

Options can look bewildering, but the entire universe of strategies is built from exactly two instruments: calls and puts. Get these and you can read everything else.

The two building blocks

• A call option gives its owner the right to buy the underlying at a set price (the strike) before expiration. You buy calls when you want to profit from — or get exposure to — a move up.
• A put option gives its owner the right to sell the underlying at the strike before expiration. You buy puts to profit from a move down, or to protect a position you own.

The key word is right, not obligation. As a buyer, the most you can lose is the premium you paid. That defined downside is one of options' most useful properties.

A long call's payoff at expiration

Two sides to every contract

For every buyer there's a seller (a "writer"), and their positions mirror each other. The buyer pays the premium for the right; the seller collects it and takes on the obligation if the buyer exercises. Selling options can generate income but carries very different — sometimes much larger — risk, which is its own discipline.

Why this is the whole game

Spreads, straddles, condors, the wheel — every strategy with an intimidating name is just calls and puts combined: buying some, selling others, at different strikes or expirations, to shape a payoff. Once you can picture what a single call or put does, you can reason about any combination by adding the pieces together.

Start here. Two instruments, four positions (buy/sell a call, buy/sell a put). Everything else is arithmetic on top.

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This article is educational and does not constitute investment advice or a recommendation. Options trading involves substantial risk and is not suitable for every investor. Autopilot Options does not guarantee profits or prevent losses. Past performance and historical data do not guarantee future results.