7561 / In the stock market, what is a “call” option? What is a “put” option?
A “put,” on the other hand, is an option contract giving the owner thereof the right to sell to the writer of the put (i.e., to “put it to him or her”), at any time before a specified future date and time, a stated number of shares of a particular stock at a specified price.2
In any case, only the grantor of an option is obligated to perform on it; the purchaser or subsequent owner of a “call” or “put” may choose to dispose of it or allow it to expire. The owner of an option (whether it is a put or a call) is referred to as holding a “long” position; the writer (i.e., grantor or seller) of an option is referred to as holding a “short” position. Thus, it is always the holder of the short position who is obligated to perform on the contract and the holder of the long position who may choose to exercise the contract or permit it to lapse.
The price a purchaser pays to the writer of an option as consideration for the writer’s obligation under the option is referred to as the “premium” or “option premium.”
1. Rev. Rul. 78-182, 1978-1 CB 265; Rev. Rul. 58-234, 1958-1 CB 279.