# Mastering Call and Put Options: Step-by-Step Examples for New Investors

Options trading can be an intimidating concept for beginners. But don’t let the jargon scare you away. Understanding options is simpler than it may seem and can be a powerful tool to add to your investment arsenal.

In this article, we’ll walk through the basics of call-and-put options, using real-world examples to help illustrate the concepts. By the end of this article, you’ll have a clear understanding of call and put options, premium, the underlying assets, and strike price

we will try to understand the concepts of call selling and call buying by using an analogy from a fruit market. Imagine the price of a crate of apples is on the rise, currently sitting at $50. In this scenario, a shop owner is extending special offers to customers. Let’s explore the strategies involved in detail.

- The fruit market owner sells a
**“price protection voucher” (call sell)**for $5 that gives someone else the right to buy 1 crate of apples at a fixed price of $50 with a validity of 1 week. If the price of apples goes up to $60 before that, the buyer can exercise their right and purchase the crate at the lower price of $50 and the fruit market owner has the obligation to sell the apples at a lower price of $50, resulting in a loss of $10 per crate for the market owner minus the voucher cost.

On the other hand, if the price of apples drops to $40 next week, the buyer will not exercise their right and will simply buy apples at the lower price of $40 without using the voucher which will expire by next week and will have no value, resulting in a profit of $5 per voucher for the fruit market owner. - You buy a
**“price protection voucher”****(call buy)**for $5 that gives you the right to buy a crate of apples at $50 next week. If the price of apples goes up to $60 next week, you can exercise your right and purchase the crate at the lower price of $50 with help of your voucher and then sell the apples at the higher price of $60 and make a profit of $10 per crate. In this way traders make money. - On the other hand, if the price of apples drops to $45 next week, you can choose not to exercise your right and simply buy apples at the lower price of $45 without using your voucher. In this case, you only lose the $5 you paid for the voucher.

Apples are the

underlying asset.

The price of the voucher which is $5 is thepremium.

The agreed price at which trade will happen which is $50 is thestrike price.

The last date till which the voucher is valid is theexpiration date.

Now suppose you are the farmer and have some apples which will be harvested by next week. but you are worried that by next week the price might go down so you go to the wholesaler.

- The wholesaler sells an agreement
**(put sell)**to you for $5 which gives you the right to sell a crate of apples at a fixed price of $50 next week. If the price of apples drops to $40 next week, then you can exercise your right and sell the crate at the higher price of $50, and the wholesaler has the obligation to buy the apples at the higher.

On the other hand, if the price goes up to $60 next week, then you will not exercise your right and simply sell it at a higher price in the market. In this case, the wholesaler keeps the premium of $5. - you buy an agreement with the wholesaler (
**put option**) for $5 that gives you the right to sell a crate of apples at $50 next week. If the price of apples drops to $40 next week, you can exercise your right and sell the crate at the higher price of $50.

On the other hand, if the price of apples goes up to $60 next week, you can choose not to exercise your right and simply sell apples at the higher price of $60 without using your voucher. In this case, you only lose the $5 premium you paid for the agreement. - In the above example instead of a farmer, it can be a trader who can buy a put option and when the prices go down he can buy the goods from the market at a lower price and sell it to the put seller(the wholesaler) as he has obligation to buy at a higher price. The Trader can only sell him the said quantity which was mentioned in the put order.

In this way traders make money, they buy and sell options taking a judgment on how the prices will move.

It’s important to note that options trading can be complex and involves risks. Before engaging in any options trading strategies, it’s essential to understand the potential risks and rewards and consult with a financial professional if necessary.

## Options Strategies with Example

Multi-leg options refer to options trading strategies that involve two or more individual options contracts, also known as “legs”. These strategies are created by combining different options contracts with different strike prices, expiration dates, and option types (calls and puts).

Multi-leg options strategies include:

**Spread:**

This strategy involves buying one option contract and selling another option contract on the same underlying asset, with different strike prices and/or expiration dates. The goal is to profit from the difference in premiums between the two options contracts.

**Straddle:**

This strategy involves buying both a call option and a put option on the same underlying asset, with the same strike price and expiration date. The goal is to profit from a significant price movement in either direction, regardless of whether the underlying asset price goes up or down.

**Iron Condor:**

This strategy involves buying and selling four different options contracts on the same underlying asset, with different strike prices and expiration dates. The goal is to profit from a neutral market outlook, where the underlying asset price stays within a certain range.

Multi-leg options strategies can provide traders with more flexibility, increased profit potential, and risk management capabilities. However, they can also be more complex and require a deeper understanding of options trading principles and techniques.

Let’s say you want to buy some apples from the fruit market, but you’re not sure how much they will cost next week. You could use multi-leg options to protect yourself against the possibility of the apple price changing too much.

Here’s an example:

**Spread:**You could buy a call option with a strike price of $10, which gives you the right (but not the obligation) to purchase a crate of apples at $10, and simultaneously sell a call option with a strike price of $12, which gives someone else the right (but not the obligation) to purchase a crate of apples from you at $12.

If the price of apples goes up to $13, you can exercise your right to buy the apples at $10 and then sell them at $12, making a profit of $2 per crate. If the price of apples goes down to $8, you can simply buy the apples at the lower market price and let the call option with a strike price of $12 expire worthless, losing only the premium you paid for buying the call option with a strike price of $10.

**Straddle:**You could buy a call option with a strike price of $10 and a put option with a strike price of $10, both with the same expiration date. This would give you the right (but not the obligation) to purchase or sell a crate of apples at $10, regardless of whether the price goes up or down.

If the price of apples goes up to $13, you can exercise your call option to buy the apples at $10 and then sell them at the higher market price for a profit. If the price of apples goes down to $8, you can exercise your put option to sell the apples at $10, which means you still make a profit.

**Iron Condor:**You could buy a call option with a strike price of $10 and simultaneously sell a call option with a strike price of $12, as well as buy a put option with a strike price of $8 and simultaneously sell a put option with a strike price of $6, all with the same expiration date. This would create a range of prices where you would make a profit, and limit your potential losses if the price of apples goes too high or too low.

Again, it’s important to note that options trading can be complex and involves risks. Before engaging in any options trading strategies, it’s essential to understand the potential risks and rewards and consult with a financial professional if necessary.

This has been just a brief overview of the world of options trading. But now that you have a basic understanding of call and put options, you may be interested in learning more. There are many resources available to help deepen your knowledge of options trading, and we encourage you to continue your education in this area. If you found this article helpful, be sure to follow me for more insights.