Types of options


Call options

A call option gives the buyer the right to buy the underlying stock at the strike price by the expiry date. The writer is obligated to sell the underlying stock to the buyer if they exercise the call.

Put options

A put option gives the buyer the right to sell the underlying stock at the strike price by the expiry date. The writer is obligated to sell the underlying stock to the buyer if they exercise the put.

Naked and covered options

If the writer of a call option owns sufficient shares of the underlying stock to sell in the event they become assigned, then they have written a covered call option.

However, if the writer does not own shares of the underlying stock, they are said to have written a naked call option.

The same principle applies to puts. If a put writer does not have the cash on hand to buy the necessary shares if the option becomes assigned, they have written a naked put.

American- and European-style options

“American-style” options may be exercised by the buyer at any time before the expiry date. Options that can only be exercised at expiry are known as “European-style” options.