What is Call Option and Put Option?
- Asked By
- Updated On:19-Mar-2021
- Replies:2
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.
Ask Your Query for FREE, Get quick answers from our FINTRAKK community!
Discussion (1)
If you're looking for a straightforward and comprehensive take on options trading, then Sensibull should do the job perfectly. However, if you're and expert and want more complex trading tools, then Opstra is the one to choose.
In this current day and age, options trading has become the new cool thing that everyone wants to try. There are many option trading platforms out there that provide various Option trading tools. Sensibull and Opstra Definege are 2 of the most prominent names in the industry.
Both of them provide all the necessary tools like OI (Open Interest) Charts, PCR (Put-call Ratio), IV (Implied Volatility) chart, etc. But the main question lies, which one of them is a better platform for Options trading. Let's find the answer to that question.
Intraday is feasible if you have enough capital and are aware of the stock's performance, while F&O helps in the prediction of the price whether it would rise or fall to book profits.
Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.
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.
There are many complex Option Trading strategies out there but the most profitable are some of the simpler ones. The top 3 of them are Long & Short Straddles, Long & Short Strangles and Bull/Bear spreads.
Options trading can be done in diverse ways. You can trade Options in unhedged or Naked positions as well as use multi-leg strategies to limit the losses. An endless combination of options can be used to put together a strategy. This can get complex sometimes. But many simple Option strategies can be used by Beginners. More of such strategies are discussed here.
Sensibull is an online Options trading platform that provides various Analysis tools that can be used to have a better understanding of the Options as well as to create and deploy various Option Trading Strategies that can be used by Investors & traders to Speculate as well as Hedge their existing portfolio. The Option Chain is an important feature of Sensibull. It is discussed in detail below.
Open Interest is a parameter used by technical analysts and options traders to judge the mood of the market. Open Interest is the total number of outstanding option contracts in a particular strike price of an underlying asset. The OI is an important factor as it defines liquidity and the total number of contracts that are traded at a particular point in time.
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.
Harshil Patel
Call 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.