Put On A Call

You have a call option. You have the right to buy Pepsi for $80 a share for another 12 weeks. You paid $3 for that option, with PEP trading at about $72 at the time you bought it a month ago. But you also now want to sell that right to someone.

A put on a call represents a compound option. Literally, it's a put on a call...a put being the option to sell an underlying asset at a pre-set price at a pre-set time. A call, meanwhile, describes an option that provides the right, but not the obligation, to buy an underlying asset at a pre-set price and at a pre-set time. So a put on a call represents the option to sell an option to buy some other underlying asset.

Let's flesh it out a bit. In this particular structure, a call exists for some underlying asset, like shares of MSFT. It has a strike price of $140. The call starts to become profitable as the price of MSFT rises above $140. However, a put option exists on this call. It's a contract that gives the holder the right to sell the call at some pre-arranged strike price.

Why not just have a put on the MSFT stock? Why make things so complicated?

At expiration, the holder of the put can choose to sell that call, meaning they have to have a call in hand in order to sell it. The call is relatively cheap compared to the price of the MSFT stock. It allows the holder of the put contract to participate in the trade without having to pay the full amount to buy the MSFT stock come expiration time.