Call Option and Put Option Important point in 2023
Call Option and Put Option today we are going to tell you in this post about What is Call Option achieved its status in the very popular share market, and today we will give you all kinds of information related to it today we will answer all your questions. If we try to answer, then stay with us in this post, so now, with no delay, let’s start.
Call Option and Put Option
A call option put option is an option contract in which the buyer has the right to buy a specific quantity of the main stock at a predetermined price without any obligation. When traders expect the price to move higher, they can take a long position in the call option.
Call option and Put Option Edelweiss
There are many mediums available for trading in the stock market. One of them is options trading. In options trading, there are terms like call and put option which are a bit difficult to understand. That’s why it is important that you trade in it only after understanding the options trading basics properly, like if you understand this concept with an example.
Suppose you are a wholesale vegetable seller. You take the help of transportation to carry the cargo of vegetables. If the price of diesel or petrol increases in the market, then you will have to pay more money for the transportation of vegetables. As a result, you will increase the price of vegetables to balance this additional expense.
Now if you look at this whole scenario, you must have come to know that if the price of petrol or diesel increases, then the prices of vegetables will also increase.
Similarly, an equity option is also a derivative instrument, whose prices depend on the movement of other financial products.
Let us talk in detail about both the Call and Put Options in this post.
Let us first understand the Call Option and Put Option Contract.
In a call option contract, a buyer has the right, but is not obligated or obligated, to buy a specified quantity of the underlying stock (Underlying Assets) as specified in the contract at a specified price at a specified time.
However, the option seller or writer has an obligation to sell the underlying asset at a specified price to the buyer in a specified quantity. However, the buyer has to pay a premium fee for taking this right. This premium amount is a part of the total contract amount.
Before buying a call option, the trader sees that the stock or index is going to rise in the future, then only that trader buys the call option.
Suppose the price of ‘A’ share is ₹ 100 and you get the right to buy this share after 3 months at ₹ 150.
You have the right to buy a call option only when the market price of the stock is above 150.
Now even if after 3 months the share price is more than ₹ 150, you will still get a chance to buy the share at ₹ 150 only.
But you will have to pay a fee of ₹ 10 for making a call option contract.
Now if after 3 months the share price will be ₹ 200, then you can exercise your right to buy the share for ₹ 150 only.
But even if the share price drops below ₹150, you still have the right to exit the contract to limit your losses.
However, here you will have to bear the loss of the premium amount.
However, the seller will not have any right to opt-out of that contract.
He happens in the hope that the share price either stays at ₹ 150 or falls below that, which will benefit him.
Now let’s talk about put options.
A put option is the exact opposite of a call option.
The fundamental difference between Call and Put Option is that in a Call Option, the buyer expects the market to go up whereas in a Put Option the buyer anticipates a bearish one.
In a put option contract, the buyer buys the right to sell. He has the right to sell the underlying at any time to the option seller at the strike price.
This means that the seller of the put option is selling the right to sell.
Thus, the buyer of a put option expects the market to be bearish and the seller of the put option to assume that the market price will remain the same until the contract expires.
It can also be understood in this way that the party who pays the premium is the Buyer and the party who takes the premium is the Seller.
Let us understand this with a simple example.
Suppose Tata Motors share is trading at ₹200. In this, the buyer of the call option buys the right to sell the shares of Tata Motors at ₹200 for ₹200 on the day of expiry of the contract.
For this, he pays a premium amount to the Contract Seller.
After collecting the premium amount, it is the obligation of the seller of the contract to buy the contract up to ₹ 200.
Suppose, on the expiry date, the Tata Motors shares come down to ₹175 for ₹175, then the contract buyer can use his rights to sell the contract seller Tata shares for ₹200.
In this way, the buyer of the contract can avail of a profit of Rs.25 per share.
If the share price of Tata Motors rises from ₹200 to ₹220, then the contract survivor gains.
In this situation, The buyer of the contract will have to bear the loss of his premium amount, which is with the seller of the contract.
What is Long Call Option Trading?
Traders can take long positions in call options when they expect the price to move higher.
In order to buy long-call options, investors have to pay a premium. Investors buy these options with the expectation of better profits.
But if the price falls below the strike price, the option holders lose the amount they paid for the premium.
For example, let us assume that the strike price of the stock is Rs 5000 and the premium is Rs 35.
It is anticipated that its price will increase in the coming months, you being a call option holder can retain your right to buy a specific quantity of shares.
The premium is the maximum amount that the buyer will be willing to pay as a loss. If the share price rises in the coming months, the buyer can exercise this call option.
If the share price does not move beyond the strike price of Rs 5000, the option expires after a particular date, thus resulting in a loss of Rs 35 for the buyer on premium.
What is Short Call Option Trading?
A short call option involves selling an option on a given main asset at a predetermined price.
This strategy leads to limited profits if the shares trade below the strike price, and attracts substantial risk if it is sold at a value higher than the strike price.
What Affects the Price of Call Option?
There are many factors that affect the price of a call option, among which the strike price and the market price are important factors.
Political events, which lead to market volatility and volatility, can push up the price of these options.
You can also use Option Scan to filter stocks for next-day trading using the StockEdge web version.
Important point
- A call option is an options contract in which the buyer has the right to buy a specific quantity of the main stock at a predetermined price without any obligation.
- When traders expect the price to move higher, they can take a long position in the call option.
- A short call option means to sell an option on a given main asset at a predetermined price.
- An index call option is the right to buy an index and the profit or loss depends on the price movement of the index.
- There are many factors that affect the price of a call option, among which the strike price and the market price are important factors.
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Some Questions Related
- How does call option work?A call option gives you the right, but not the requirement, to purchase a stock at a specific price (known as the strike price) by a specific date, at the option’s expiration. For this right, the call buyer will pay an amount of money called a premium, which the call seller will receive.
- How do call options make money?A call option writer stands to make a profit if the underlying stock stays below the strike price. After writing a put option, the trader profits if the price stays above the strike price. An option writer’s profitability is limited to the premium they receive for writing the option (which is the option buyer’s cost).
- Is options trading just gambling?There’s a common misconception that options trading is like gambling. I would strongly push back on that. In fact, if you know how to trade options or can follow and learn from a trader like me, trading in options is not gambling, but in fact, a way to reduce your risk.
- Can you get rich with stocks?Investing in the stock market is one of the world’s best ways to generate wealth. One of the major strengths of the stock market is that there are so many ways that you can profit from it. But with the great potential reward also comes great risk, especially if you’re looking to get rich quickly.
- Can you make a living trading options?Trading options for a living is possible if you’re willing to put in the effort. Traders can make anywhere from $1,000 per month up to $200,000+ per year. Many traders make more but it all depends on your trading account size.
Conclusion
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