Options are derivatives or contracts that permit investors to trade the right to purchase or sell a specific security at a particular price. There are two primary forms of options: Call Options and Put Options.
Put options allow the holder to sell shares of the underlying securities, whilst call options grant the ability to buy the underlying security to the contract holder. Both may be used to enable investors to make money from price changes in stock. The way they operate, though, differs significantly.
American-style options allow unlimited exercise before expiry, but European-style options are exercised only on the expiration date.
Let’s take a closer look at what are options? and their forms.
What are Options?
Depending on the option’s type, an option is a contract that grants its owner, the holder, the right—but not the obligation—to purchase or sell a particular quantity of the underlying asset or instruments at a given strike price on or before a specific date.
Every option contract will include a time frame by which the holder of the option must exercise their rights. The striking price is the amount that is specified on an option. Retail or online brokers are frequently used to buy and sell options.
Options trading offers hedge and speculating opportunities with essential to sophisticated tactics. Investors should carefully consider the risks even if there are several possibilities to earn with options.
Now that your query of “what are options” is solved, let’s look at their types!
Types of Options in India
Although several options are available on the stock market, Call and Put options are the most common.
Call Option
An option contract known as a “call” gives the owner the right, but not the duty, to purchase a certain quantity of the underlying security at a specific price within a certain period. The price at which the sale may be made is referred to as the striking price, and the period in which the sale may be made is referred to as the expiry or maturity period.
The maximum loss on a call option is the premium, which is the cost you pay per share to acquire the option. Call options may be bought for speculative purposes or sold for income or tax planning.
Put Option
The buyer of a put has the choice, but not the responsibility, to sell an underlying asset at the contract’s designated strike price. If the put buyer exercises their option, the writer, who is the seller of the put option, is compelled to purchase the asset. Investors purchase puts when they anticipate a decline in the underlying asset’s price and sell options when they anticipate a gain.
Also Read: What is a Trading Account?
Difference between Call Option and Put Option
We discovered the call option is the right to purchase the underlying shares at a predetermined price throughout the contract’s validity when working with options derivatives, whereas a put option is the ability to sell.
Let’s compare and see the difference between call and put options and compare the several intriguing aspects of them.
|
Call Options |
Put Options |
| A call option gives the holder the right to purchase an underlying stock or contract at a specific price later but at a price that is established today. | The right to sell an underlying stock or contract at a defined price later but at a price determined today is known as a put option. |
| Buyer of this option purchases the stock | Buyer of this option sells the stock |
| The holder of a call option has the choice but is not required to buy a predetermined amount at a preset strike price at a specific future expiration date. | The rights to sell the underlying securities at a future date and a certain amount are granted to the buyer of a put option. They are not required to do the same, though. |
| A call option’s potential gain is limitless since there is no mathematical upper bound on any underlying growing price. Technically, there is no limit to the price. | Because a stock’s price is not physically able to be zero, the possible gain in the put option would be mathematically limited. |
| Profits come when the share price rises | Profits come when the share price falls |
| Call options may be profitable or unsuccessful. For instance, a call option is said to be in-the-money, or ITM, if the current price exceeds the strike price. The option is called out of the money, or OTM if the spot price is lower than the strike price. | It will either be in or out of the money for put options. For instance, a put option is said to be in-the-money, or ITM, if the spot price is lower than the strike price. The put option is called out of the money, or OTM if the spot price is higher than the strike price. |
Conclusion
Coming to an end with the difference between call and put option, let’s recall what we’ve learned so far. Derivatives are called options to allow you to acquire or sell the right to buy or sell equities at a predetermined price. While there is no danger in purchasing options, there is theoretically limitless risk involved in selling them.
Consider this while deciding what options to utilize in your investment plan and whether to purchase or sell options. Do not forget that trading derivatives have a higher risk than trading equities.
The cycle of options contracts includes both call and put options. Those who purchase call options must purchase shares, whereas those who buy put options must sell shares. Profits are produced based on market movements and a predetermined price.
We hope this article guided you well. Start your trading game today!