Options: Calls and Puts Explained for Canadian Beginners

What Is an Option?

An option is a financial contract that gives you the right — but not the obligation — to buy or sell an underlying asset (a stock or ETF) at a predetermined price called the strike price, on or before an expiry date. In exchange for that right, the buyer pays a premium to the seller.

In Canada, equity and ETF options are traded primarily on the Montreal Exchange (Bourse de Montreal). One standard contract controls 100 shares — a crucial detail when calculating real costs and profits.

Calls vs. Puts: The Core Difference

There are only two basic option types:

• Call (call option): gives you the right to buy the asset at the strike price. You profit if the price rises well above the strike.
• Put (put option): gives you the right to sell the asset at the strike price. You profit if the price falls below the strike.

Key Terms You Need to Know

Strike, Expiry, and Premium

The strike price is the price at which you can exercise your right. The expiry date is the deadline — after it passes, the contract ceases to exist. The premium is what you pay to buy the option. For buyers, this is the maximum possible loss.

In-the-Money vs. Out-of-the-Money

• In-the-money (ITM): the asset's current price is favourable relative to the strike (e.g., a call with a $50 strike when the stock trades at $55).
• Out-of-the-money (OTM): exercising right now would be unfavourable. Most options expire OTM — meaning worthless.

Intrinsic Value and Time Value

An option's premium has two components: intrinsic value (what you would gain by exercising right now) and time value (the probability that the option becomes profitable before expiry). As expiry approaches, time value erodes — this is time decay (theta). Time decay works against buyers and in favour of sellers.

The Other Side of the Trade: The Seller (Writer)

For every option buyer there is a seller, also called a writer. The seller collects the premium but takes on an obligation: if the buyer exercises, the seller must deliver. Selling a naked call (without holding the underlying shares) creates theoretically unlimited downside if the stock soars. This type of strategy is reserved for experienced, approved traders.

The most widely known seller strategy is the covered call: you already hold the shares and sell a call against them to generate income. It is lower risk than a naked call, but it caps your upside. To learn more about ETFs that use this strategy, see our article on covered call ETFs in Canada.

Common Uses of Options

• Leveraged speculation: control 100 shares for a fraction of the cost. But leverage amplifies losses just as readily as gains.
• Hedging: buying a protective put works like insurance on a stock position — it limits your downside if the price falls.
• Income generation: selling covered calls on existing positions to earn regular premium income.

The psychological pull of options can be powerful and dangerous. Our article on behavioural biases in Canadian investing explains why our brains are poorly wired for this kind of leveraged, time-sensitive risk.

Risks: What Every Beginner Must Understand

Important warning: Options are complex instruments that can result in a total loss of your investment — and, if you sell uncovered options, losses far exceeding your initial outlay. OSC GetSmarterAboutMoney and CIRO both note that options require a specific broker approval level and are not suitable for beginners.

• A purchased option can expire completely worthless — you lose 100% of the premium.
• Time decay erodes an option's value every single day, even when the market is flat.
• Selling naked options can produce very large or unlimited losses.
• The tax treatment of options in Canada is complex. Consult a tax professional before trading.

Before considering options, make sure you have a solid foundation: understand the difference between a cash account and a margin account, and be aware of the most common investing mistakes Canadians make.

Frequently asked questions