Understanding Options – Call Option & Put Option

Series – III: Understanding Options – Call Option & Put Option

Volatility is an inevitable part of stock markets; it is arguably one of the most misunderstood concepts in investing. Investing is inherently about risk, but risk works both ways. Each trade carries with it the risk, both, of failure and of success.

Market volatility may provide numerous money-making opportunities for the patient & intelligent trader. This was one of the reasons of beginning of OPTIONS TRADING.

In this article, we will try to understand Options and their types and explore the factors that how one can take advantage of movements in stocks / Indices through option trading.

What are the OPTIONS?

Options are the derivatives instruments which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Types of Options :

  • CALL OPTION –

Option, which gives buyer a right to buy the underlying asset for a set price, at certain future date is called Call Option.

Call option generates money when value of the underlying asset is rising upwards.

  • PUT OPTION –

Option, which gives buyer a right to sell the underlying asset for a set price, at certain future date is called Put Option.

Put option will extract money when value of underlying is falling.

How Options are different from futures

Future vs Options

A future is a right and an obligation to buy or sell an underlying stock (or other assets) at a predetermined price and deliverable at a predetermined time. Options are a right without an obligation to buy or sell equity or index. A call option is a right to buy while a put option is a right to sell.

Call Option Buy vs Future Buy

Future BuyCall Option Buy
PaymentRequired to pay marginRequired to pay premium only
Maximum ProfitUnlimitedUnlimited
Maximum LossUnlimitedPremium Paid
Profit Calculation (Before Expiry)Future Current Price – Buying PriceCurrent Premium – Premium Paid
Profit Calculation (On Expiry)Future Current Price – Buying PriceSpot Price – Strike Price – Premium Paid

Put Option Buy vs Future Sell

Future BuyCall Option Buy
PaymentRequired to pay marginRequired to pay premium only
Maximum ProfitUnlimitedUnlimited
Maximum LossUnlimitedPremium Paid
Profit Calculation (Before Expiry)Buying Price – Future Current PriceCurrent Premium – Premium Paid
Profit Calculation (On Expiry)Buying Price – Future Current PriceStrike Price – Spot Price – Premium Paid

Buyer vs Seller in Options

BuyerSeller
Pay PremiumEarn Premium
Max Profit – Unlimited Max Profit – Premium Earned
Max Loss – Premium PaidMax Loss – Unlimited
No Margin requiredFull margin required
No ObligationObligation to buy or sell underlying assets.

Conceptually Options are much broader topic and this article is just a brief of it.

In coming days we will make an effort to post more about options and how to hedge and build option strategies.

One Comment

  1. Dinesh radhani

    Great
    Sir I want to know that option volume is 100000 then same time open interest is 1050000
    That mean this oi is of previous day and from today volume it might be increased or decreased we will come to after market close whom has squared up position will decrease and some of them as add the position
    I am having right information or I am wrong plz confirm me

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