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.
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-
Difference between Call Option and Put Option
The call option is exercised by the party in favor of bearish conditions.
The party exercises the put option in favor of bullish conditions.
Without any obligation, it allows the right to buy an underlying asset or security at the pre-determined date and on a fixed strike price.
It offers the right to sell an underlying asset or security on a particular date and a fixed strike price, without any obligation.
Investors using the call option expect an increase in stock or share price.
Investors using the put option expects the stock or share to decrease in the market.
Profit is unlimited in the call option since there is no limit to the amount of price rise.
In the Put option, limited profit is expected as price decreases will ultimately be stopped at zero.
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.