Call Option and Put Option

More on Derivatives

Options trading may seem overwhelming at first, but it’s easy to understand if you know a few key points related to the Call Option and Put Option. 

Are you feeling bewildered about options trading?

It’s true that although this term has been used many times in the Indian financial sector, however to a certain extent, options trading as a subject still continues to prevail as an enigma. 

And, if you are also one of such, then before stepping into the stock market playground, you must familiarise yourself with the meaning of option trading. 

Options trading is an integral part of derivatives trading that tends to give a right to a buyer and seller to execute the trade in the future date. 

Also, Know about the Pros and Cons of Option Trading and Is Option Trading Safe? in detail

This date is pre-fixed between the two parties (buyer and seller), and even the price, also known as the strike price, is usually fixed. 

The duration of the contract is shorter such as a few days, weeks, or a month too. 

So, in any case, the contract holder feels that the stock price is going to move in the opposite direction; he can instantly execute without getting any loss.

Generally, there are two different types of options- The Call option and the Put option.

These terms seem to be alike; however, they are different from one another but before differentiating them, let’s understand their meaning one-by-one.

What are Call Options and Put Options?

Who doesn’t want to know what are call options and put options? 

Of course everyone…

Let’s begin with the call option first! 

Call Option: Call Option is exercised by the buyer or seller prevailing in the bullish condition to purchase the underlying asset or security. 

By opting for a call option, he gets the right to exercise his option and buy the asset during and before the expiry of the contract at the fixed price. 

Whenever a call option holder, i.e., a bullish party (buyer or seller), analyzes the market and predicts that the stock movement will go opposite to his present position, he can immediately execute the order. 

Thus, saving himself from losses! You must be aware of the When to Sell Call Option?

Also Read: How to Calculate Profit on Call Option?

What about Put Option? 

Put Option: Put Option is opted by the party in favor of bearish condition and gets the right to buy or sell the asset anytime during the validity of the contract.

Thus, if he feels that the market is going bullish or opposite to his condition, he can smoothly execute the trading order.

Does it felt exhausting and a bit confusing? Worry not; we are here with an example too! 

Sounds pleasant, right? So, let’s get started! 


Call Option and Put Option with Examples

Examples seem to be more soothing and act as an excellent way to learn complex terms like call options and put options in a simple way.

Beginning with the call option example:


Call Option Example

Assume that XYZ India stocks are available at Rs. 200 for each share. 

An investor named Bikram holds 200 such shares and endeavors to generate income beyond the dividend. The shares are not likely to increase beyond Rs. 220 in the next month.

Now, Bikram evaluates call options to find that a call trading of Rs. 220 exists at 40p each contract. The investor sells one call option and receives Rs. 80 as premium (40p X 200 shares).

If the shares’ price rises beyond Rs. 220, a buyer of the option will exercise the right. 

Then, Bikram will have to execute the shares at Rs. 220 per share. However, if the amount does not rise more than Rs. 220, Bikram will stick to the shares, and this will not has an effect on the sale.


Now, that was about call options. Let’s consider an example of a put option too. 


Put Option Example

For instance, assume that an investor named Gagan owns one put option on the company name ABC INDIA — and finds that its share is presently trading at  Rs. 277 —with a strike price of Rs. 260 to be valid for one month. 

For this option, the party paid a premium, or token money, of around Rs. 72.

Gagan strongly believes that the shares of the company- ABC INDIA will increase to around Rs. 389 per share. 

However, as the contract was about to expire, he analyzed that the prices are about to go down. The very next day, he found that the shares of ABC INDIA fall to Rs. 250.

Gagan quickly exercises the put option and finishes the contract with the company so that his losses can be lesser. 


Difference Between Call Option and Put Option

The call option and Put option seem to be similar however, there are a plethora of differences between them. 

To know those differences, check-out the table given below-

 

Hence, from the above table, it is clear the majority of the investors forecasting an increase in stock price and favoring bearish conditions will move towards the call option feature. 

However, the ones in favor of the bullish condition will observe a sudden fall in the stock or shares prices, ultimately exercising their put option. 

Also Read: Stock vs Shares


Summing Up

Call option and put option may seem strange at first; however, if you clearly know about them and have risk-appetite, then definitely no investment avenue is better than them.

In order to grow in option and take the wise decision, you can choose the best indicator for option trading to avoid the risk.

There is no free lunch with the stock market, not even with equities. Each segment has different risks and boundaries. Knowing these risks makes the journey smooth and less overwhelming.

Call option and Put options unleash a plethora of perks in granting higher cost-efficiency and are additionally available as a less risky investment avenue as compared to equities. 

Finally, the call option and put option provides a well thought out alternative to investors and traders. It is thus helping them to deliver greater profits along with risk diversification.

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