Are puts riskier than calls? Risks to Consider

Short Answer

Puts are Calls are both risky in their own terms. For calls it is necessary to make decisions well as there are chances that you make loose the premium. In case of puts it is important to strategize the the options well.

Detailed Answer

Introduction to Options:

Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. Options differ from shares in that shares offer a specific ownership in the company, while options do not. Even when it comes to risk, both shares and options are less risky than shares because options can be withdrawn at any time. Options account for nearly 80% of all derivatives traded in India, with futures accounting for the remainder.

They will purchase a call option on this asset and sell a put option on it. A ‘call option' is one that allows you to buy an option that will allow you to buy shares later, while a ‘put option' is one that allows you to sell an option that will allow you to earn shares later.

Call Option:

The 'Call Option' gives the option investor the right to buy a particular asset at market value on or before the maturity period in return for a premium charged in return to the seller. When we buy a ‘Call option,' we want and anticipate the price to rise because it will assist us in purchasing the commodity or asset at a lower (pre-determined) price than the current value, making it more desirable.

Put Option:

The ‘Put Option' allows customers to take the right to sell a certain product at market value at any time before or on the date of maturity in return for a premium paid up front. When we offer a ‘Put Option,' you want and expect the price to drop because it will help you sell the commodity or asset for a higher price than the real price, making it more attractive and profitable. To pay from either a put option, a person must also pay an additional amount known as "Premium."

Risk Factor in Put and Call options:

Options trading is anyway risky and involves various such factors. It is important for the investors to study the market well before investing in it. There are risks in both call and put options but they both are attached with different kinds of risks.

The most significant risk of a call option is that the company's stock will only rise slightly. This could result in a loss of funds on your portfolio. Since an investor needs to pay a premium per stock, this is the case. You will only get a modest balance between risk and return if the stock does not cover the expense of the premium.

A put option is basically a risk management strategy for your investments. It is essential to check on how an individual should deal with the options and strategize it so as to avoid losses.

Conclusion:

When market expects a stock's prices to increase, they buy a call option, and then when they intend a value of the stock to decline, they sell a put option. Investing in call or put options is highly risky and not recommended for the ordinary small investor.

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Categories: Option Trading
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Discussion (1)

    Never invest in options on any "calls" or "insights" from others. Options trading needs to be executed with technical analysis and with the determination of the trend of the market. Try to study the charts and see where the market might go next and figure out probabilities. However, in an uptrend, calls are effective but on a downtrend, puts are better. Both have their own risks and that's where stop losses come into the picture. Never engage in a trade provided you have suitable stop losses.

Related FAQs

What is Call Option and Put Option?

Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. The two most impactful options are Call Options and Put Options.

Why is Options Trading considered risky?

Options trading is different from traditional share trading in many ways. Trading in options includes multiple factors like high leverage, delivery obligation on the date of expiry, unlimited loss potential, etc. All these factors make trading in options riskier.

How does Gamma affects risk in Options trading?

Gamma is an Option Greek that affects the change in the Option premiums. Options traders need to know about Gamma and some other Option greeks to calculate the risk per trade. The effect of Gamma becomes stronger as the expiry approaches. The Gamma also increases as an Option becomes ITM or ATM from OTM. Know more about it here.

What is Uncovered or Naked Options Trading?

Naked or Uncovered Option trading is a type of trading/speculating where a Call or Put option is bought or sold by different individuals at the same time expecting different price direction movements. Naked Option trading is a Zero-Sum game which means that the Profit for one is a Loss for the other individual.

How much money is required for Options trading?

Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.

Why is Options Trading more risky on the expiry day?

Options trading involves many factors such as Options Greeks. Options Greeks like Delta, Theta, and Gamma have the most impact on Option prices towards the end of the expiry. The option premiums are impacted highly by Gamma and Delta on the day of expiry. Learn more about Options greeks and how they impact option premiums.

What can high open interest rate indicate about options?

Open Interest or OI is a parameter to measure the number of Outstanding contracts (Not Squared off) at a particular strike price. The near strike prices to the Spot has higher Open interest compares to OTM (Out of The Money) contracts. Higher OI has many benefits like High liquidity and low spreads and some disadvantages.

Can I trade in US Options from India?

Yes, individuals can trade US options from India. There are many platforms as well which allows the individuals to trade internationally, it just depends on them what they are comfortable the most with and prefer trading from.

What is difference between Long Call vs. Short Call?

Short call and long call are the call option strategies and individuals buy or sell the shares. There are various differences between them and are important to be known. The elaborated version is described below.

What is an Iron Condor trade in options?

An Iron Condor is a 4 legged hedged option strategy that includes selling 1 slightly OTM (Out of The Money) Call as well as 1 Put option and, buying 1 Slightly Far OTM Put & 1 Call options in order to cover the risk of the Naked short positions. This strategy is implemented when the overall outlook of the underlying asset is neutral or rangebound and no major moves in any direction are anticipated. The maximum profit and loss are capped in this strategy, and by hedging, margin benefits can be enjoyed.