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Derivatives are mainly used for hedging purposes. Let us now learn about option contracts, which is one type of derivative. Option contracts are often entered into to lower risk. Option contract buyers have the right to purchase or sell the asset at a specified price. However, there is no obligation. The option contract seller is obligated to purchase or sell the underlying asset according to the buyer's choice. There are two types of options: call option and put option. This article will explain the differences between call option and put options. You should be familiar with certain terms, such as spot price, strike price, premium, expiry, and expiry dates.
Strike Price: This is the price at which the contract between buyer and seller is concluded.
Spot Price is the price at which an asset trades on the cash market. This is the current market price. The current market price.
Premium: This is the amount the buyer must pay to the seller.
Expiry Date: This date is the expiry date for the option contract. It's the last day that the option buyer has the right to purchase or sell the asset.
Contract Cycle: The contract cycle usually lasts 3 months and expires on Thursday of each month.
Two parties are required to enter into a contract. In this instance, it is the call option buyer or seller. The call option buyer is entitled to purchase the underlying asset at a specified price. He is not obliged to buy the underlying asset, while a call option seller is obligated to sell the contract according the call option buyer's decision. This will be explained using an example. Mr. A purchases a call option contract of Mr. B, where the strike price for the specific underlying asset is Rs. 500 If the asset's spot price is Rs. If the spot price of the asset is Rs. 1000, Mr. A would rather buy it from Mr. B than to sell it on the market at Rs. 1000, thereby generating a profit Rs. 500 If the spot price is Rs. 800, Mr. A would rather buy the asset from the market than Mr. B. The premium must be paid by the call buyer. Call buyer is only at risk of losing the premium paid, but call seller faces a loss that is unimaginable.
The put option is similar to the call option. There are two parties, such as the put buyer and seller. The put option buyer is entitled to sell the asset, while the seller of the option has to purchase it. For the buyer of put options, the loss is limited to the premium. However, for sellers of put options, there could be unlimited losses. Let's take an example to illustrate this. Mr. Ajay believes that the stock's price will fall so he buys a put options contract. The contract is purchased by Mr. Ajay at a premium from Mr. Kumar, the seller of put options. He could have entered the contract at Rs. 1000, but the spot stock price becomes Rs. 700 Mr. Ajay would then sell the contract to the seller of put options at Rs. Ajay would make a profit of Rs. 1000 by selling the contract to the put option seller at Rs. 300
Simply put, a call option buyer or seller is bullish and a put option buyer or seller is bearish. It is easy to learn option trading. You can start using option strategy by reading many books. This article will help you understand the difference between put and call.
| S. No | Call Option | Place Option |
|---|---|---|
| 1 | This gives you the right to purchase the underlying asset. | This gives you the right to sell the underlying assets. |
| 2 | Price to increase | Price to fall |
| 3 | Profits can be unlimited | Profits are very limited |
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