What is Call Option and Put Option?
Short Answer
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.
Detailed Answer
What is Call Option?
The 'Call Option' gives the option holder the right to buy a particular asset at book value on or before the maturity date in return for a premium charged in advance to the seller.
Call Options - Features
- It is a derivative.
- A buyer will earn profits when the asset primary to it will increase its price.
- They can also be used for combination strategies or spread strategies.
- Strike price and expiration date plays a major role in call option as any individual can buy up to 100 shares of any firm at a price which is called as Strike Price and the date till he/she can do this is called as expiration date.
- When we buy a ‘Call option,' we want and anticipate the price to rise as this will assist us in purchasing the product or asset at a lower (pre-determined) price than the current value, making it more valuable.
- The premium is paid to the call writer/seller.
- One of the important objectives for being a call buyer is to protect against a short position on the same underlying.
- In case the price of the primary asset does not escalate before the expiration date, above the strike price then the call then ends meaningless because buying the underlying explicitly again from market is inexpensive.
- You can sell the call option in two ways: covered call option and naked call option.
- A call option is usually an economy bullish bet, meaning it reduces when the value of the commodity security gains.
What is Put Option?
The ‘Put Option' gives the investor the right to sell a certain product at market value at any time before or on the maturity date in return for a premium paid up ahead.
Put Options - Features
- In this case, the loss you bear is the price you pay as premium to purchase the put option.
- The maximum loss= strike price- premium.
- They have the expectation that the price of the primary asset will fall within that particular time frame.
- Stocks, indices, commodities, and currencies all have placed options accessible.
- If the stock price rises over the contract's term, the investor only stands to lose the premium amount; the real asset valuation is not at risk.
- When an investor purchases a put, he or she might be doing so in order to acquire the underlying security at a lower price.
- Because of the effect of time decay, the cost of a put option declines as the duration to maturity advances.
- An individual can generate income by writing put option.
- A put option is usually an economy bearish bet, meaning it gains when the value of the commodity security falls.
- If the buyer wishes to accept the offer, the investor who sold the put is obliged to obtain the underlying stock.
- If the stock is sold to the seller, the premium paid is deducted from the shareholder's purchase cost.
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Discussion (1)
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.
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 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.
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.
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.
Are puts riskier than calls? Risks to Consider 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.
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.
Which Options Greeks should you know about before Trading Options? Options Premiums are primarily made up of two values. Intrinsic Value and Time Value. Whereas the change in the price of the Option premiums is dependent on five factors called Option Greeks. These are Delta, Gamma, Theta, Vega, and Rho. Know more about options greeks and which Greeks should a trader keep an eye on while trading Options.
What is the minimum amount required for Options Trading in India? Options are of two types- call option and put option. You need quite an amount of money to trade in options because it has costs such as premium, brokerage. etc. To know more about the topic, read the detailed version.
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.
Harshil Patel
Wednesday, June 9th, 2021, 10:18 AMCall options are option contracts where you believe that the market would reach a particular point in a day or week. It's based on the bullish nature of the market. Put options are options contracts where you tend to trade during the bearish nature of the market. Profits are made if the market treads below a certain point in the market.